1. How do the structure of yields to maturity on U.S Treasury bonds, implied spot rates, and implied one year forward rates relate to the "market's" expected future one year interest rates under the liquidity premium theory of the term structure of interest rates, and the different shapes which the yield curve can take? Demonstrate and explain.
2. Carefully explain how the presence of asymmetric information involving two contracting parties to a debt contract (say a simple loan) can result in adverse selection and moral hazard problems. (Be sure to describe the features of each of these two problems.) How could indirect financing through financial intermediaries act to reduce the magnitude of each of these problems? Carefully explain.