Treasury securities describe the general shape and

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Unformatted text preview: g your findings in part a, draw a yield curve for U.S. Treasury securities. Describe the general shape and expectations reflected by the curve. d. What would a follower of the liquidity preference theory say about how the preferences of lenders and borrowers tend to affect the shape of the yield curve drawn in part c? Illustrate that effect by placing on your graph a dotted line that approximates the yield curve without the effect of liquidity preference. e. What would a follower of the market segmentation theory say about the supply and demand for long-term loans versus the supply and demand for shortterm loans given the yield curve constructed for part c of this problem? LG1 6–6 Nominal and real rates and yield curves A firm wishing to evaluate interest rate behavior has gathered data on nominal rate of interest and on inflationary expectation for five U.S. Treasury securities, each having a different maturity and each measured at a different point in time during the year just ended. (Note: Assume that the risk that future interest rate movements will affect longer maturities more than shorter maturities is zero; that is, there is no maturity risk.) These data are summarized in the following table. U.S. Treasury security Point in time Maturity Nominal rate of interest 2 years 12.6% Inflationary expectation A Jan. 7 B Mar. 12 C May 30 D Aug. 15 20 years 11.0 8.1 E Dec. 30 5 years 11.4 8.3 10 years 6 months 9.5% 11.2 8.2 13.0 10.0 298 PART 2 Important Financial Concepts a. Using the preceding data, find the real rate of interest at each point in time. b. Describe the behavior of the real rate of interest over the year. What forces might be responsible for such behavior? c. Draw the yield curve associated with these data, assuming that the nominal rates were measured at the same point in time. d. Describe the resulting yield curve in part c, and explain the general expectations embodied in it. LG1 6–7 Term structure of interest rates The following yield data for a number of highest quality corporate bonds existed at each of the thr...
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