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Unformatted text preview: 6-4LG 1:Yield curvea.b.The yield curve is slightly downward sloping, reflecting lower expected future rates of interest. The curve may reflect a general expectation for an economic recovery due to inflation coming under control and a stimulating impact on the economy from the lower rates.6-6LG 1: Inflation measureThe inflation expectation for a specific maturity is the difference between the yield and the real interest rate at that maturity.MaturityYieldReal rate of interestInflation expectation3 months1.41%0.80%0.61%6 months1.710.800.912 years2.680.801.883 years3.010.802.215 years3.700.802.9010 years4.510.803.7130 years5.250.804.456-7LG 1: Real rate of returnA bond can experience a negative real return if its interest rate is less than the inflation rate as measured by the CPI. The real return would be zero if the bond rate was 3.3%, exactly matching the CPI rate. To obtain a minimum 2% real return, the bond rate would have to be at least 5.3%....
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