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Determinants of Interest Rates Suppose you and most other investors expect the inflation rate to be 8% next year, to fall to 4% during the
Determinants of Interest Rates Suppose you and most other investors expect the inflation rate to be 8% next year, to fall to 4% during the following year, and then to remain at a rate of 3% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on Treasury securities rise from zero on very short-term securities (those that mature in a few days) to a level of 0.2 percentage points for 1-year securities. Furthermore, maturity risk premiums increase 0.2 percentage points for each year to maturity, up to a limit of 1.0 percentage point on 5-year or longer-term T-notes and T-bonds. a. Calculate the interest rate on 1-year Treasury securities. Round your answer to two decimal places. Calculate the interest rate on 2-year Treasury securities. Round your answer to two decimal places. Calculate the interest rate on 3-year Treasury securities. Round your answer to two decimal places. ate on 4-year Treasury securities. Round your answer to two decimal places Calculate the interest rate on 5-year Treasury securities. Round your answer to two decimal places. Calculate the interest rate on 10-year Treasury securities. Round your answer to two decimal places. Calculate the interest rate on 20-year Treasury securities. Round your answer to two decimal places. b. Select the correct graph for approximate yield curve of Long Island Lighting Company, a risky nuclear utility & yield curve based on the results above in Requirement a. Suppose ExxonMobil's bonds, rated AAA, have the same maturities as the Treasury bonds. As an approximation, plot an ExxonMobil yield curve on the same graph with the Treasury bond yield curve. (Hint: Think about the default risk premium on ExxonMobil's long-term versus its short-term bonds.) Select the correct graph. 19 Interest Rate 1 Interest Rate t n LILCO Treasury ENWOO reservernme DOENWUo00o Exxon 12 Treasury 101 Exxon LILCO Years to Maturity Years to Maturity * 4-251 246810121416182022 24 4251 2 4 6 8 10121416182022 24 19 Interest Rate Interest Rate Exxon 00 ONWU 00 00 OENWUo0o Exxon LILCO Treasury Treasury Years to Maturity Years to Maturity
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