1. Assuming that 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 years, and plot the resulting yield curves for the following series of one-year interest rates over the next five years:

a. 5 %, 7%, 7%, 7%, 7%

b. 5%, 4%, 4%, 4%, 4% How would your yield curves change if people pre- ferred shorter-term bonds over longer-term bonds?