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. One-period

Question 1 (20 marks) The table below shows two different paths

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. One-period interest rate Multi-period interest rate Period Path I Path II Path I Path II 1 2.00% 9.00% 2 4.00% 7.00% 3 6.00% 5.00% 8.00% 3.00% 5 10.00% 1.00% 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. One-period interest rate Multi-period interest rate Period Path I Path II Path I Path II 1 2.00% 9.00% 2 4.00% 7.00% 3 6.00% 5.00% 8.00% 3.00% 5 10.00% 1.00% 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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