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18. Problem 6.18 (Yleld Curves) eBook Suppose the inflation rate is expected to be 5% next year, 4% the following year, and 2% thereafter. Assume

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18. Problem 6.18 (Yleld Curves) eBook Suppose the inflation rate is expected to be 5% next year, 4% the following year, and 2% thereafter. Assume that the real risk-free rate, r, will remain at 1% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premiums Increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-year or longer-term T-bonds a. Calculate the interest rate on 1-, 2-, 3-, 4., 5., 10., and 20-year Treasury securities. Round your answers to two decimal places. Treasury securities Interest rate 1-year M 2-year 16 3-year 4-year 96 5-year % 10-year 20-year Select the correct yield curve based on these data. 10 Interest Rate (9) 9 B 7 6 4 5 9 1012141610 Years to Maturity B 10f Interest Rate (%) NinoMN - 2 4 6 8 10 12 14 16 18 Years to Maturity 20 Interest Rate (%) 9 8! 7 6 5 4 31 2 1 2 4 6 8 10 12 14 16 18 Years to Maturity D Interest Rate (%) 101 D B 7 6 5 4 3 . 2 4 6 8 10 12 14 16 16 Years to Maturity D Interest Rate (%) 8 2 4 6 8 10 12 14 16 10 Years to Maturity The correct sketch is sewe 1. Suppose a AAA-rated company (which is the highest band rating a firm can have) had bonds with the same maturities as the Treasury bonds. Estimate what you believe a AAA-rated company's yield curve would look like on the same graph with the Treasury bond yield curve (Hint: Think about the default risk premium on its long term versus its short-term bonds) The yield risk curve for the AM-rated corporate bonds will the yield curve for the Treasury securities c. What will be the approximate vield curve of a much riskler lower-rated company with a much higher risk of defaulting on its bonds? The yield risk curve of a much risker lower rated company will be the weld curve for the Treasury securities and see the yield curve for the MA rated corporate bonds

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