Yield Question 2 Maturity 1 year 2 years 0.26% 0.64% Liquidity Premium 0 0.08% (a) Given the information above, estimate the forward rate for year 2 based on (1) pure expectation theory, and (ii) liquidity theory. (12 marks) (b) Critically argue why a yield curve is more likely to have an upward slope under liquidity theory. (7 marks) (c) Critically discuss the following statement: An upward-sloping yield curve persists because many investors stand ready to jump into the stock market." (6 marks) (Total: 25 marks)