Question: 1.Assuming that the expectations theory is the correct one for the term structure, calculate the interest rates in the term structure for maturities one to

1.Assuming that the expectations theory is the correct one for the term structure, calculate the interest rates in the term structure for maturities one to six years:

a. 4%, 4%, 5%, 6%, 6%, 6%

b. 5%. 5%, 4%, 4%, 4%, 4%

Explain what is happening to the yield curve.

2. Refer to the previous problem (1above. Assume that instead of the expectations theory, the liquidity premium theory takes place. What will be your answer to parts a and b, if the following liquidity premiums are expected? 0%; 0.25%, 0.5%, 0.75%, 1%, and 1.25% respectively?

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