Suppose it is 2020 and the 1-year interest rate is 4 percent. The expected 1-year rates in the following four years (2021 to 2024) are 4 percent, 5 percent, 6 percent, and 6 percent.

a. Assume the expectations theory of the term structure, with no term premiums. Compute the interest rates in 2020 on bonds with maturities of 1, 2, 3, 4, and 5 years. Draw a yield curve.

b. Redo part (a) with term premiums. Assume the term premium for an n-year bond, Tn, is (n/2)%. For example, the premium for a 4-year bond is (4/2)% = 2%.