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:

1. 4%, 4%, 5%, 6%, 6%, 6%

2. 5%. 5%, 4%, 4%, 4%, 4%

Q. 02:

Refer to the previous problem. 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?

anser Q2