Ch. 6 HW
1.
Zane Perelli currently has $92 that he can spend today on polo shirts costing
$ 23 each. Alternatively, he could invest the $92 in a risk-free U.S. Treasury
security that is expected to earn a 8% nominal rate of interest. The consensus
forecast of leading economists is a 4% rate of inflation over the coming year.
a)
How many polo shirts can Zane purchase today?

b)
How much money will Zane have at the end of 1 year if he forgoes purchasing
the polo shirts today? (Ignore taxes.)

c)
The expected price of the polo shirts at the end of 1 year in light of the
expected inflation is

d)
Using your findings in parts
b
and
c,
the number of polo shirts Zane can
purchase at the end of 1 year is _____ shirts

In percentage terms, the more or fewer polo shirts Zane can buy at the end of
1 year is

e)
Zane's real rate of return over the year is
How is the real rate of return related to the percentage change in Zane's

buying power found in part
d
?

2.
A firm wishing to evaluate interest rate behavior has gathered yield data on
five U.S. Treasury securities, each having a different maturity and all
measured at the same point in time. The summarized data follow
U.S. Treasury Security
Time to Maturity
Yield
A
1 year
14.5%
B
10 years
13.2%
C
6 months
14.9%
D
20 years
12.6%
E
5 years
13.7%
a)
Select the graph that correctly shows the yield curve associated with the data
shown in the table.

b)
Describe the resulting yield curve in part
a
, and explain the general
expectations embodied in it.