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Unformatted text preview: l Zane have at the end of 1 year if he forgoes purchasing the polo shirts today?
c. How much would you expect the polo shirts to cost at the end of 1 year in
light of the expected inflation?
d. Use your findings in parts b and c to determine how many polo shirts
(fractions are OK) Zane can purchase at the end of 1 year. In percentage
terms, how many more or fewer polo shirts can Zane buy at the end of 1
e. What is Zane’s real rate of return over the year? How is it related to the percentage change in Zane’s buying power found in part d? Explain. LG1 6–4 Yield curve 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 12.6% B 10 years 11.2 C 6 months 13.0 D 20 years 11.0 E 5 years 11.4 CHAPTER 6 Interest Rates and Bond Valuation 297 a. Draw the yield curve associated with these data.
b. Describe the resulting yield curve in part a, and explain the general expectations embodied in it.
LG1 6–5 Nominal interest rates and yield curves A recent study of inflationary expectations has revealed that the consensus among economic forecasters yields the following average annual rates of inflation expected over the periods noted. (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.)
Period Average annual rate of inflation 3 months 5% 2 years 6 5 years 8 10 years 8.5 20 years 9 a. If the real rate of interest is currently 2.5%, find the nominal interest rate
on each of the following U.S. Treasury issues: 20-year bond, 3-month bill,
2-year note, and 5-year bond.
b. If the real rate of interest suddenly dropped to 2% without any change in
inflationary expectations, what effect, if any, would this have on your
answers in part a? Explain.
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