Suppose the inflation rate is expected to be 6% next year, 4% the following year, and 2% thereafter. Assume that the real risk-free rate, r*, will remain at 1% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-year or longer-term T-bonds. a. Calculate the interest rate on 1-, 2-, 3-, 4., 5., 10-, and 20-year Treasury securities. Round your answers to two decimal places. Interest rate % % % Treasury securities 1-year 2-year 3-year 4-year 5-year 10-year 20-year 0% % % % Select the correct yield curve based on these data. 10Interest Rate (%) 2 4 6 8 10 12 14 16 18 Years to Maturity B Interest Rate (%) B Interest Rate (%) 1 -2 2 4 6 8 10 12 14 16 18 Years to Maturity Interest Rate (%) -2 2 4 6 8 10 12 14 16 18 Years to Maturity D Interest Rate (%) 9 8 5. Interest Rate (%) 101 8 2 4 6 8 10 12 14 16 18 Years to Maturity D Interest Rate (%) 101 -2 2 4 6 8 10 12 14 16 18 Years to Maturity The correct sketch is -Select- b. Suppose a AAA-rated company (which is the highest bond rating a firm can have) had bonds with the same maturities as the Treasury bonds. Estimate what you believe a AAA-rated company's yield curve would look like on the same graph with the Treasury bond yield curve. (Hint: Think about the default risk premium on its long-term versus its short-term bonds.) The yield risk curve for the AAA-rated corporate bonds will -Select the yield curve for the Treasury securities. c. What will be the approximate yield curve of a much riskier lower-rated company with a much higher risk of defaulting on its bonds? The yield risk curve of a much riskier lower-rated company will be -Select the yield curve for the Treasury securities and -Select the yield curve for the AAA- rated corporate bonds. Suppose the inflation rate is expected to be 6% next year, 4% the following year, and 2% thereafter. Assume that the real risk-free rate, r*, will remain at 1% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-year or longer-term T-bonds. a. Calculate the interest rate on 1-, 2-, 3-, 4., 5., 10-, and 20-year Treasury securities. Round your answers to two decimal places. Interest rate % % % Treasury securities 1-year 2-year 3-year 4-year 5-year 10-year 20-year 0% % % % Select the correct yield curve based on these data. 10Interest Rate (%) 2 4 6 8 10 12 14 16 18 Years to Maturity B Interest Rate (%) B Interest Rate (%) 1 -2 2 4 6 8 10 12 14 16 18 Years to Maturity Interest Rate (%) -2 2 4 6 8 10 12 14 16 18 Years to Maturity D Interest Rate (%) 9 8 5. Interest Rate (%) 101 8 2 4 6 8 10 12 14 16 18 Years to Maturity D Interest Rate (%) 101 -2 2 4 6 8 10 12 14 16 18 Years to Maturity The correct sketch is -Select- b. Suppose a AAA-rated company (which is the highest bond rating a firm can have) had bonds with the same maturities as the Treasury bonds. Estimate what you believe a AAA-rated company's yield curve would look like on the same graph with the Treasury bond yield curve. (Hint: Think about the default risk premium on its long-term versus its short-term bonds.) The yield risk curve for the AAA-rated corporate bonds will -Select the yield curve for the Treasury securities. c. What will be the approximate yield curve of a much riskier lower-rated company with a much higher risk of defaulting on its bonds? The yield risk curve of a much riskier lower-rated company will be -Select the yield curve for the Treasury securities and -Select the yield curve for the AAA- rated corporate bonds
