Assuming that the expectations theory is the correct theory of the term structure, calculate, for each part, the interest rates in the term structure for maturities of one to five years, and plot the resulting yield curve for the following paths of one-year interest rates over the next five years:
a) 5%, 6%, 7%, 6%, 5%
b) 5%, 4%, 3%, 4%, 5%
How would your yield curves change if people preferred shorter-term bonds over longer-term bonds?