Problem:
The yield to maturity on one-year zero-coupon bonds is 7.1%. The yield to maturity on two-year zero-coupon bonds is 8.1%.
Required:
Question 1: What is the forward rate of interest for the second year?
Question 2: If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year?
Question 3: If you believe in the liquidity preference theory, is your best guess as to next year's short-term interest rate higher or lower than in (b)?
Note: Please provide full description.