Question
U.S. Treasury bond data shows the following information: Inflation next year is estimated to be 5%, 3% the following year, and 1% thereafter. The real
U.S. Treasury bond data shows the following information: Inflation next year is estimated to be 5%, 3% the following year, and 1% thereafter. The real risk-free rate will remain at 3% and the maturity risk premium starts at 0.2% for a 1-year bond and increases by 0.2% for each year after that up to a maximum of 1%. Calculate the interest rates for a 1-, 2-, 3-, 4-, 5-, and 10-year Treasury securities. Plot a yield curve for the Treasury securities. Plot an estimated yield curve for a AA-rated company on the same curve. What economic information could be taken from this graph?
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