Suppose that interest rate on one year bond is 4 percent today and is expected to be 5 percent one year from now , 6 percent two years from now, and 6 percent three years from now. Assume the expectation theory of the term structure, with no term premium and compute the following: All underlying work must be shown

a. Are bonds prices on the long-end of the yield curve falling or rising? Why?

b. What might the yield curve indicate about expected return on long-term bonds?

c. Given the slope of the yield curve today, would you rather be lender or borrower in the next four years? Why?