Assuming the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five years, and plot the resulting yield curves for the following paths of one-year interest rates over the next five years: a. 5% 7% 7% 7% 7%
b. 5% 4% 4% 4% 4%
How would your yield curve change if people preferred shorter term bonds to long term bonds?