Question
Suppose you and most other investors expect the inflation rate to be 6% next year, to fall to 5% during the following year, and then
Suppose you and most other investors expect the inflation rate to be 6% next year, to fall to 5% during the following year, and then to remain at a rate of 3% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on Treasury securities rise from zero on very short-term securities (those that mature in a few days) to a level of 0.2 percentage points for 1-year securities. Furthermore, maturity risk premiums increase 0.2 percentage points for each year to maturity, up to a limit of 1.0 percentage point on 5-year or longer-term T-notes and T-bonds.
Select the correct graph.
- Calculate the interest rate on 1-, 2-, 3-, 4-, 5-, 10, and 20-year Treasury securities. Round your answer to two decimal places.
Years to Maturity Interest rate 1 % 2 % 3 % 4 % 5 % 10 % 20 % - Select the correct graph for approximate yield curve of Long Island Lighting Company (LILCO), a risky nuclear utility & yield curve based on the results above in Requirement a. Suppose ExxonMobil's bonds, rated AAA, have the same maturities as the Treasury bonds. As an approximation, plot an ExxonMobil yield curve on the same graph with the Treasury bond yield curve. (Hint: Think about the default risk premium on ExxonMobil's long-term versus its short-term bonds. The default risk premium is assumed to be 3.00 percentage points on the 20-year Exxon bonds.)
Select the correct graph.
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