You observe the following market interest rates, for both borrowing and lending: One-year rate = 5% two-year rate = 6% one-year rate one year from now = 7.25% How can you take advantage of these rates to earn a riskless profit? Assume that the Pure Expectation Theory for interest rates holds.

2. If bonds of different maturities are close substitutes, their interest rates are more likely to move together. Is this statement true, false, or uncertain? Explain your answer.