Question
Nominal and real rates and yield curves In order to assess interest rate behavior, a company has collected the following data on the nominal interest
Nominal and real rates and yield curves In order to assess interest rate behavior, a company has collected the following data on the nominal interest rate and inflationary expectations for five U.S. Treasury securities, each of which has a different maturity and was measured at a different time during the year just ended. (Note: assume that the risk that future interest rate movements may affect long maturities more than short maturities is zero; in other words, assume that there is no maturity risk). The corresponding data are summarized in the table below.
Value of U.S. Treasury | Point in Time | Maturity | Nominal rate of interest | Inflationary expectation |
A | January 7 | 2 years | 12.6% | 9.5% |
B | March 12 | 10 years | 11.2 | 8.2 |
C | May 30 | 6 months | 13.0 | 10.0 |
D | August 15 | 20 years | 11.0 | 8.1 |
E | December 30 | 5 years | 11.4 | 8.3 |
a. From the above data, determine the real interest rate at each of the times indicated.
b. Describe the behavior of the interest rate throughout the year. What forces could be responsible for it?
c. Plot a yield curve related to the data, assuming that the nominal interest rates were measured at the same point in time.
d. Describe the yield curve you obtained in (c), and explain the general expectations evident in it.
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