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Nominal interest rates and yield curves Economic forecasters predict that the rate of inflation will hold steady at 1.5% per year indefinitely. The table, LOADING...

Nominal interest rates and yield curves Economic forecasters predict that the rate of inflation will hold steady at

1.5%

per year indefinitely. The table,

LOADING...

, shows the nominal interest rate paid on the Treasury securities having different maturities.

a.Approximately what real interest rate do Treasury securities offer investors at each maturity?

b.If the nominal rate of interest paid by every Treasury security suddenly dropped by

1%

without any change in inflationary expectations, what effect, if any, would this have on your answers in part

a?

c.Using your findings in part

a,

select the appropriate yield curve for U.S. Treasury securities. Describe the general shape and expectations reflected by the curve.d. What would a follower of the liquidity preference theory say about how the preferences of lenders and borrowers tend to affect the shape of the yield curve in part

c?

e. What would a follower of the market segmentation theory say about the supply and demand for long-term loans versus the supply and demand for short-term loans given the yield curve in part

c?

a. The real rate of interest on the 3-month U.S. Treasury bill is

nothing%.

(Round to one decimal place.)The real rate of interest on the 2-year U.S. Treasury note is

nothing%.

(Round to one decimal place.)The real rate of interest on the 5-year U.S. Treasury bond is

nothing%.

(Round to one decimal place.)The real rate of interest on the 10-year U.S. Treasury bond is

nothing%.

(Round to one decimal place.)The real rate of interest on the 20-year U.S. Treasury bond is

nothing%.

(Round to one decimal place.)b.If the nominal rate of interest paid by every Treasury security suddenly dropped by

1%

without any change in inflationary expectations, what effect, if any, would this have on your answers in part

a?

(Select the best answer below.)

A.The real interest rate in each case would decrease by

1%.

B.The real interest rate in each case would increase by

1%.

C.

The real interest rate in each case would stay the same.

D.The real interest rate in each case would decrease by

0.5%.

E.The real interest rate in each case would increase by

0.5%.

c.Using your findings in part

a,

which of the following graphs shows the appropriate yield curve for the U.S. Treasury securities in the table?(Select the best answer below.)

A.

Yield Curve of U.S. Treasury Securities

05101520061218Time to Maturity (years)Yield (%)

x y graph

B.

Yield Curve of U.S. Treasury Securities

05101520061218Time to Maturity (years)Yield (%)

x y graph

C.

Yield Curve of U.S. Treasury Securities

05101520061218Time to Maturity (years)Yield (%)

x y graph

D.

Yield Curve of U.S. Treasury Securities

05101520061218Time to Maturity (years)Yield (%)

x y graph

Describe the general shape and expectations reflected by the curve.(Select from the drop-down menus.)

The yield curve is

flat

upward sloping

humped

downward sloping

, indicating that interest rates are expected to be

the same in the long term.

lower in the long term.

higher in the long term.

higher in the intermediate term.

d. What would a follower of the liquidity preference theory say about how the preferences of lenders and borrowers tend to affect the shape of the yield curve in part

c?

(Select the best answer below.)

A.

Followers of the liquidity preference theory would state that the upward sloping shape of the curve is due to the desire by lenders to lend short term and the desire by business to borrow long term.

B.

Followers of the liquidity preference theory would state that the upward sloping shape of the curve is due to the desire by business to lend short term and the desire by lenders to borrow long term.

C.

Followers of the liquidity preference theory would state that the downward sloping shape of the curve is due to the desire by lenders to lend short term and the desire by business to borrow long term.

D.

Followers of the liquidity preference theory would state that the upward sloping shape of the curve is due to the desire by lenders to lend long term and the desire by business to borrow short term.

e. What would a follower of the market segmentation theory say about the supply and demand for long-term loans versus the supply and demand for short-term loans given the yield curve in part

c?

(Select the best answer below.)

A.

Market segmentation theorists would argue that the upward slope is due to the fact that under current economic conditions there is greater demand for short-term loans for items such as real estate than for long-term loans for seasonal needs.

B.

Market segmentation theorists would argue that the upward slope is due to the fact that under current economic conditions there is a smaller demand for long-term loans for items such as real estate than for short-term loans for seasonal needs.

C.

Market segmentation theorists would argue that the downward slope is due to the fact that under current economic conditions there is greater demand for long-term loans for items such as real estate than for short-term loans for seasonal needs.

D.

Market segmentation theorists would argue that the upward slope is due to the fact that under current economic conditions there is greater demand for long-term loans for items such as real estate than for short-term loans for seasonal needs.

(Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)

Maturity

Nominal rate of return

3 months

6.5%

2 years

7.5

5 years

8.5

10 years

9.5

20 years

11.5

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