There are 3 term securities available with the following series of 1-year interest rates:
Security A: 4%, 5%, 3%, 3%, 4%
Security B: 4%, 2%, 3%, 5%, 6%
Security C: 5%, 3%, 3%, 4%, 2%
Assume the expectations theory (without uncertainty) of the term structure is correct:
(a) Calculate the term structure interest rates for maturities of 1 to 5 years, for all 3 securities.
(b) Draw the yield curves for the 3 term securities of length 1 to 5 years.
(c) Which security, if you must choose 1, will you buy if you plan to have it mature in 3 years? How about 5 years?
(d) Can you do better than part c if you are allowed to be creative with your securities portfolio?