Prepare calculations and a one- to two-page analysis (excluding the title and references pages) that addresses the following:
Assuming that the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturity. Next, plot the resulting yield curves for the following series of one-year interest rates over the next five years using both a and b.
a. 5%, 7%, 7%, 7%, 7%
b. 5%, 4%, 4%, 4%, 4%
Next, discuss how your yield curves would change if people preferred short-term bonds over long-term bonds. Explain what the textbook suggests will happen if the short-term rate is much cheaper than the long-term in interest rate. Explain whether or not that is a normal occurrence or a cause for alarm.
