Question: Question 1 (20 marks) The table below shows two different paths of current and expected future one-period interest rates over the next five periods. Period

Question 1 (20 marks) The table below shows two different paths of current and expected future one-period interest rates over the next five periods. Period 1 N 2 3 One-period interest rate Multi-period interest rate Path Path II Path 1 Path II 2.00% 9.00% 4.00% 7.00% 6.00% 5.00% 8.00% 3.00% 10.00% 1.00% 3 4 5 a Assuming the pure expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five periods. (10 marks) b How would the shape of yield curves in part (a) change if investors preferred short-term bonds to long-term bonds? (10 marks) Question 1 (20 marks) The table below shows two different paths of current and expected future one-period interest rates over the next five periods. Period 1 N 2 3 One-period interest rate Multi-period interest rate Path Path II Path 1 Path II 2.00% 9.00% 4.00% 7.00% 6.00% 5.00% 8.00% 3.00% 10.00% 1.00% 3 4 5 a Assuming the pure expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five periods. (10 marks) b How would the shape of yield curves in part (a) change if investors preferred short-term bonds to long-term bonds? (10 marks)

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