Question
Question 1 0/10 Submit Question Content Area Excel Activity: Interest Rate Determination and Yield Curves The data has been collected in the Microsoft Excel file
Question 1
0/10
Submit
Question Content Area
Excel Activity: Interest Rate Determination and Yield Curves
The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations.
Download spreadsheet Interest Rate Determination and Yield Curves-7a4640.xlsx
What effect would each of the following events likely have on the level of nominal interest rates?
Households dramatically decrease their savings rate.
This action will
increasedecrease
the supply of money; therefore, interest rates will
increasedecline
.
Corporations decrease their demand for funds following a decrease in investment opportunities.
This action will cause interest rates to
increasedecrease
.
The government runs a smaller-than-expected budget deficit.
The smaller the federal deficit, other things held constant, the
higherlower
the level of interest rates.
There is a decrease in expected inflation.
This expectation will cause interest rates to
increasedecrease
.
Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, A-rated corporate bond. The current real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.2%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP.
Corporate Bond Yield | ||||
Rate | Spread = DRP + LP | |||
U.S. Treasury | 0.73 | % | ||
AAA corporate | 0.83 | 0.10 | % | |
AA corporate | 1.19 | 0.46 | ||
A corporate | 1.61 | 0.88 |
What yield would you predict for each of these two investments? Round your answers to three decimal places.
12-year Treasury yield: fill in the blank 7 %
7-year Corporate yield: fill in the blank 8 %
Given the following Treasury bond yield information, construct a graph of the yield curve.
Maturity | Yield | |
1 year | 5.27 | % |
2 years | 5.37 | |
3 years | 5.51 | |
4 years | 5.56 | |
5 years | 5.49 | |
10 years | 5.60 | |
20 years | 6.09 | |
30 years | 5.78 |
Choose the correct graph.
The correct graph is
graph Agraph Bgraph Cgraph D
.
A. |
| B. |
|
C. |
| D. |
|
Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places.
Years | Treasury yield | A-corporate yield | ||
1 | 5.27 | % | fill in the blank 10 % | |
2 | 5.37 | % | fill in the blank 11 % | |
3 | 5.51 | % | fill in the blank 12 % | |
4 | 5.56 | % | fill in the blank 13 % | |
5 | 5.49 | % | fill in the blank 14 % | |
10 | 5.60 | % | fill in the blank 15 % | |
20 | 6.09 | % | fill in the blank 16 % | |
30 | 5.78 | % | fill in the blank 17 % |
Choose the correct graph.
The correct graph is
graph Agraph Bgraph Cgraph D
.
A. |
| B. |
|
C. |
| D. |
|
Which part of the yield curve (the left side or right side) is likely to be most volatile over time?
Short-term rates are
moreless
volatile than longer-term rates; therefore, the
leftright
side of the yield curve would be most volatile over time.
Using the Treasury yield information in part c, calculate the following rates using geometric averages (round your answers to three decimal places):
The 1-year rate, 1 year from now
fill in the blank 21 %
The 5-year rate, 5 years from now
fill in the blank 22 %
The 10-year rate, 10 years from now
fill in the blank 23 %
The 10-year rate, 20 years from now
fill in the blank 24 %
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started