Jack Trading and Brokerage Ltd. wishes to evaluate interest rate behavior. They have gathered data from five Treasury securities issued by Deutsche Bundesbank, Germany’s central bank. Each security has a different maturity and all measured at the same point in time. The summarized data follow.

a. Draw the yield curve associated with these data.

b. Describe the resulting yield curve in part a, and explain what it says about the future direction of interest rates assuming under the expectations theory.

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Bundesbank Treasury security Time to maturity AB A DE 5 years 10 years 20 years 1 year 6 months Yield 5.2% 6.3 7.5 3.1 2.3