For parts (a) and (b), suppose the pure expectations hypothesis is correct.
a. If a 5-year Zero has a YTM of 4% and an 8-year Zero has a YTM of 6%, then what do investors expect the rate on 3-year Zeroes to be in 5-years?
b. Circle the correct one of the two choices in parentheses below. According to the liquidity preference and expectations theories, which of the following would contribute to an upward sloping yield curve? 1. Investors prefer (long- or short-) term bonds. 2. Borrowers prefer (long- or short-) term loans. 3. Investors expect spot rates to (decrease or increase). 4. Investors expect future economic growth to be (high or low).