Discuss what the pure expectations theory would imply about the yield curve. Compare and contrast the yields and maturities for each of the securities.

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According to pure expectations, the rate of interest on securities with longer maturities is higher than shorter-term ones because there’s only one way to purchase them: buy them and keep them till maturity. This means that prices for these investments are expected to remain stable over time as long as there’s no changes in market conditions.

If this is applied to yield curves it would suggest that the yields of securities with longer maturities are typically higher than those for shorter ones. A 10-year bond might yield 6%, while a bond with a maturity of 3 years may only offer 5%. This can depend on a number of factors, such as perceived credit risks associated with an issuer and any changes in the market’s sentiment.

It’s important to remember that even though securities may have the same maturity, their yields will vary. T-bills, for example, tend to have lower yields than bonds because they are less risky due to their short duration. High yield bonds can offer higher payouts with more risks.

In general, knowing how yield curves function can provide investors with insights on what to expect as far as returns from their investment. This will help them make informed decisions.