The following yields on U.S. Treasury securies were taken from a recent financial publicaon Term Rate 6 months 5.1% 1 year 5.5 2 years 5.6 3 years 5.7 4 years 5.8 5 years 6.0 10 years 6.1 20 years 6.5 30 years 6.3 a. Plot a yield curve based on these data. b. What type of yield curve is shown? c. What informaon does this graph tell you? d. Based on this yield curve, if you needed to borrow money for longer than 1 year, would it make sense for you to borrow short-term and renew the loan or borrow long-term? Explain. 2. REAL RISK-FREE RATE You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.5%. Your brother-in-law, a broker at Safe and Sound Securies, has given you the following esmates of current interest rate premiums: Inflaon premium = 3.25% Liquidity premium = 0.6% Maturity risk premium = 1.8% Default risk premium= 2.15% On the basis of these data, what is the real risk-free rate of return? 3. EXPECTATIONS THEORY AND INFLATION Suppose 2-year Treasury bonds yield 4.5%, while 1-year bonds yield 3%. r* is 1%, and the maturity risk premium is zero. a. Using the expectaons theory, what is the yield on a 1-year bond 1 year from now? b. What is the expected inflaon rate in Year 1? Year 2