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1. The yield curve for zero-coupon bonds is as follows: Maturity (Years) Yield to Maturity 1 10% 2 11% 3 12% a. What are the implied one year forward rates? b. Assume that the pure expectations hypothesis is correct. If market expectations are accurate, what will be the yield to maturity on one-year zero-coupon bonds next year? c. If the pure expectations hypothesis is correct and market expectations are correct, what is the yield to maturity on two-year zero coupon bonds one year from now. d. If you believe in the liquidity preference theory, would your projected yield to maturity in part e be higher or lower? 2. The Hospital Pension Fund contains noncallable US Treasuries shown in the table below. Par Value Treasury (S) Security Market Value (S) Price if Yields Change Up 100 Down 100 Basis Basis Points Points Current Price (Per $100 of Par Value) 101.391 Modified Duration 99.245 103.595 2.15 100.000 86.372 116.887 48,000,000 2.375% 48.667.680 Due 2023 50,000,000 4.75% Due 50.000.000 2045 98,000,000 Total Bond 98.667,680 Portfolio a. Using the information in the table, calculate the modified duration of the 4.75% Treasury Security due 2045 and the modified duration of the portfolio. b. The portfolio manager states to the board of the hospital: "If you changed the maturity structure of the bond portfolio to result in a portfolio duration of 5.25. the price sensitivity of that portfolio would be identical to the price sensitivity of a single, noncallable Treasury security that has a duration of 5.25." In what circumstance would the portfolio manager's remark be correct

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