CEINS Chapter 5 Spreadsheet Problem The Cost of Money (Interest Rates) a. Assume the expected inflation rates for the next five years are as follows: Year Inflation Rate 1 8.0% 2 6.0 3 4.0 4 3.0 5.0 5 In Year 6 and thereafter, inflation is expected to be 3 percent. The maturity risk premium (MRP) is 0.1 percent per year to maturity for bonds with maturities greater than six months, with a maximum MRP equal to 2 percent. The real risk-free rate of return is currently 2.5 percent, and it is expected to remain at this level long into the future. Compute the interest rates on Treasury securities with maturities equal to one year, two years, three years, four years, five years, 10 years, 20 years, and 30 years. Draw the yield curve. b. Discuss the yield curve that is constructed from the results in part (a). Describe what the shape of the yield curve indicates about future interest rates