Assume that yields on U.S. Treasury securities were as follows: RATE TERM 6 months 1 year 2 years 3 years 4 years 5 years 10 years 20 years 30 years 4.75% 5.37 5.67 5.79 5.83 6.04 6.31 6.62 6.75 a. Select a correct yield curve based on these data. A Interest Rate (%) un 10 15 20 25 Years to Maturity. . Interest Rate (%) 64 5 4 31 21 1 5 10 15 20 25 Years to Maturity I Interest Rate (%) 8 70 6+ 5+ 4+ 3+ 2 1 25 D 9 Interest Rate (%) 8 7 6 5 4 3 2 1 5 10 -1 15 20 25 Years to Maturity T The correct sketch -Select- A What type of yield B -Select- D n? b. What type of yield curve is shown? -Select- The yield curve is abnormal. The yield curve is upward sloping. h tel The yield curve is flat. The yield curve is downward sloping. The yield curve is inverted, wnat information does this graph tell you? -Select- In general, the rate of inflation is expected to increase as the maturity risk premium is less than zero. In general, the rate of inflation is expected to decrease and the maturity risk premium is less than zero. In general, the rate of inflation is expected to increase and the maturity risk premium is greater than zero. The shape of the yield curve depends only on expectations about future inflation, which is expected to increase. In general, the rate of inflation is expected to decrease and the maturity risk premium is greater than zero. es d. Based on this yield curve, if you needed to borrow money for longer than 1 year, would it make sense for you to borrow short term and renew the loan or borrow long term? Explain. 1. Even though the borrower reinvests in increasing short-term rates, those rates are still below the long-term rate, but what makes the higher long-term rate attractive is the rollover risk that may possibly occur if the short-term rates go even higher than the long-term rate (and that could be for a long time!). II. Generally, it would make sense to borrow short-term because each year the loan is renewed the interest rate would be higher III. Generally, it would make sense to borrow short-term because each year the loan is renewed the interest rate would be lower IV. Generally, it would make sense to borrow long-term because each year the loan is renewed the interest rate would be lower. V. Differences in yields that may exist between the short-term and long-term cannot be explained by the forces of supply and demand in each market. -Select- HI IN V