a. What effect would each of the following events likely have on the level of nominal interest rates? 1. Households dramatically decrease their savings rate. This action will the supply of money; therefore, interest rates will 2. Corporations increase their demand for funds following an increase in investment opportunities. This action will cause interest rates to 3. The govemment runs a smaller-than-expected budget deficit. The smaller the federal deficit, other things held constant, the the level of interest rates. 4. There is a decrease in expected inflation. This expectation will cause interest rates to b. Suppose you are considering two possible investment opportunities: a 12 -year Treasury bond and a 7 -year, A-rated corporate bon b. Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, A-rated corporate bond. The current real risk-free rate is 5%, and inflation is expected to be 3% for the next 2 years, 4% for the following 4 years, and 5% thereafter. The maturity risk premium is estimated by this formula: MRP =0.03(t1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yieid: 7-year Corporate yield: c. Given the following Treasury bond yield information, construct a graph of the yield curve. 12-year Treasury yield: % 7-year Corporate yield: % c. Given the following Treasury bond yield information, construct a graph of the yield curve. Choose the correct graph. The correct graph is B. Yield Carve A. Yield Carve C. Yield Carve D. Yiels Corve c. Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve araph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places. Choose the correct graph. The correct graph is Using the Treasury vieid information in part c, calculate the following rates using geornetric averages (round your answers to threef decimal places): 1. The 1-year rate, 1 year from now 2. The 5-year rate, 5 years from now 3. The 10-year rate, 10 years from now 4. The 10-year rate, 20 years from now % 5. Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, A-rated corporate bond. The current real risk-free rate is 5%, and inflation is expected to be 3% for the next 2 years, 4% for the following 4 years, and 5%. thereafter. The maturity risk premium is estimated by this formula: MRP =0.03(t1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. What yield would you predict for each of these two investments? Round your answers to three dedmal places. 12-year Treasury yield: 7-year Corporate yield
