Copy of Interest+Rate+yield+curve

Copy of Interest+Rate+yield+curve - Suppose you and most...

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Unformatted text preview: Suppose you and most other investors expect the inflation rate to be 7% next year, to fall to 5% during the then to remain at a rate of 3%, thereafter. Assume that the real risk-free, r*, will remain at 2% and that ma premiums on Treasury securities rise from zero on very short-term securities (those that mature in a few d 0.2 percentage points for each year to maturity, up to a limit of 1.0 percentage point on a 5-year or longer T-bonds. a.)Calculate the interest rate on 1-, 2-, 3-, 4-, 5-, 10- and 20-year Treasury securities, and plot the yield cu Years to maturity Risk free rate (r*) 1 2 3 4 5 10 20 Expected Inflation 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% Inflation Premium (IP) Market risk Interest premium (MRP) Rate on treasury securitie s Kt = K+IP+M RP 7.00% 0.20% 9.20% 6.00% 0.40% 8.40% 4.99% 0.60% 7.59% 4.49% 0.80% 7.29% 4.19% 1.00% 7.19% 3.59% 1.00% 6.59% 3.30% 1.00% 6.30% 7.00% 5.00% 3.00% 3.00% 3.00% 3.00% 3.00% Yield Curve 10.00% 9.00% 8.00% Interest Rate 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 0 5 10 15 Year to Maturity 20 25 In 3.00% 2.00% 1.00% 0.00% 0 5 10 15 Year to Maturity 20 25 year, to fall to 5% during the following year, and ill remain at 2% and that maturity risk those that mature in a few days) to a level of point on a 5-year or longer-term T-notes and urities, and plot the yield curve. ...
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