Expectations theory of the term structure

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Assume that a 1- year discount bond (bond A) with a face value of $1,000 is currently trading at PV = $938.97, and another 2-year discount bond (bond B) with identical risk features and face value is currently trading at $834.01.

A) Please calculate the next year anticipated price on the bond A according to the Expectations Theory of the Term Structure

B) Please calculate the next year anticipated price of the bond A according to the Liquidity Premium Theory of the Term Structure under assumption that investors require additional 1.5 percentage point’s premium to consider a 2-year investment, ceteris paribus.

C) In your own words, explain the major differences between the two Theories.

Reference no: EM13795873

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