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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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