Suppose in the Wall Street Journal you see the following current (spot) interest rates for Treasury bonds with an upward sloping yield curve:
5-year bond rate = 1.45%; 10-year bond rate = 2.13%
a. Under the expectations theory, what is the expected 5-year bond rate (forward rate) 5 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why.
b. For the problem in 12a., if there is a liquidity premium of 0.10% for a 5-year bond and 0.20% for a 10-year bond, under the liquidity premium theory (adjusting for liquidity premiums incorporated in bond rates) what is the new expected 5-year bond rate 5 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why

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The Answer of Suppose in the Wall Street Journal you see the following current (spot) interest rates for Treasury bonds with an upward sloping yield curve:
5-year bond rate = 1.45%; 10-year bond rate = 2.13%
a. Under the expectations theory, what is the expected 5-year bond rate (forward rate) 5 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why.
b. For the problem in 12a., if there is a liquidity premium of 0.10% for a 5-year bond and 0.20% for a 10-year bond, under the liquidity premium theory (adjusting for liquidity premiums incorporated in bond rates) what is the new expected 5-year bond rate 5 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why

Suppose in the Wall Street Journal You See the Following