As an analyst for ANZ, part of your job is to understand the yield curve of Commonwealth Government Securities. The latest yields on CGS are listed below. You have been asked to provide an explanation for the current yield curve using the three theories, pure expectations theory, liquidity premium theory and segmented markets theory. Obviously to fully explain the theories you will need to include in your brief any assumptions of the theories and any calculations regarding forward rates that aid in the explanation of the curve under a particular theory.
1 year yield 4.50%
2 year yield 4.75%
3 year yield 5.25%