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2. Nominal Interest Rates/Yield Curves Forecasters predict that the annual rate of inflation will continue to be 1.2% for the foreseeable future. The nominal interest
2. Nominal Interest Rates/Yield Curves Forecasters predict that the annual rate of inflation will continue to be 1.2% for the foreseeable future. The nominal interest rate of Treasury securities with different maturities is shown below: Maturity 3 months 1 year 2 years 5 years 10 years 20 years Nominal Rate of Return 2.0% 2.2% 2.6% 3.2% 3.8% 4.5% a. Plot the yield curve using Excel (hint: use the decimal equivalent for 3 months) b. What shape is the yield curve? What does it say about the future direction of interest rates under the expectations theory? c. Approximately what real interest rate do Treasury securities offer investors at each maturity? d. If the nominal rate of interest paid by every Treasury security above suddenly increased by 1.5%, without any change in inflationary expectations, what effect, if any, would it have on your answers to part c? Explain. 2. Nominal Interest Rates/Yield Curves Forecasters predict that the annual rate of inflation will continue to be 1.2% for the foreseeable future. The nominal interest rate of Treasury securities with different maturities is shown below: Maturity 3 months 1 year 2 years 5 years 10 years 20 years Nominal Rate of Return 2.0% 2.2% 2.6% 3.2% 3.8% 4.5% a. Plot the yield curve using Excel (hint: use the decimal equivalent for 3 months) b. What shape is the yield curve? What does it say about the future direction of interest rates under the expectations theory? c. Approximately what real interest rate do Treasury securities offer investors at each maturity? d. If the nominal rate of interest paid by every Treasury security above suddenly increased by 1.5%, without any change in inflationary expectations, what effect, if any, would it have on your answers to part c? Explain
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