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    Yield curve and expectations theory

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    Assume that expectations theory is the correct theory, calculate the interest rates in the term structure for maturities of one to five years, and plot the resulting yield curves for the following series of one-year interest rates over the next five years .

    year 1 5%,
    year 2 7%,
    year 3 7%,
    year 4 7%,
    year 5 7%,

    and can you explain also that,

    How would my yield curve change if people preferred shorter term bonds over longer term bonds?

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    Solution Preview

    For the second part of your question... As people prefer short term bonds over long term bonds, the demand for short term bonds will go up (shifting the demand curve to the right) while the demand for long term bonds ...

    Solution Summary

    The solution explains the yield curve and expectations theory using the scenario below.