Nominal and real rates and yield curves A firm wishing to evaluate interest rate behavior has gathered data on nominal rate of interest and on inflationary expectation for five U.S. Treasury securities, each having a different maturity and each measured at a different point in time during the year just ended.

(Note : Assume that the risk that future interest rate movements will affect longer maturities more than shorter maturities is zero; that is, there is no maturity risk .)These data are summarized in the following table:

a. Using the preceding data, find the real rate of interest at each point in time.

b. Describe the behavior of the real rate of interest over the year. What forces might be responsible for such behavior?

c. Assuming that the nominal rates were measured at the same point in time, select the graph that correctly shows the yield curve associated with the data in the table.

d. Describe the resulting yield curve in part c, and explain the general expectations embodied in it.

U.S. Treasu security Nominal rate inflationary of interest expectation ry Maturity 2 years 10 years 6 months 20 years 5 years Point in time an. Mar. 12 May 30 Aug. 15 Dec. 30 14.2% 12.6 14.9 12.3 12.7 9.7 11.8 9.4 9.5