Securehttps://www.math lest.aspxTtestld-183223765&icenterwin-yes; FI 400 Carmon
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Securehttps://www.math lest.aspxTtestld-183223765&icenterwin-yes; FI 400 Carmon Es& Quiz: Chapter 6 Time Remaining: 00 This Question: 1 pt 5 of 10 (5 complete) This Nominal interest rates and yield curves A recent study of inanonary expectatoes has reveaed hat the coreensus anog eco ome lorealers that the risk that future interest rate movements will afect longer maturbes more than shorter maturties is zero, that s, there is no maturity risk) the iskorg awagi anaian spent te imos nit at the real tate ofint e te r er y25% h d the nominala erit restor each of the tlo ing STrea rysses 20yea bend3mn bil 2year note and 5year b d b. If the real rate of merest suddenly dr pped to 2% wmout any change n ntaorary epectatons, what enedianwoud ths have on your ansens n part a? e Using your findings in part a, select the appropriate yield curve for U.S Treasury securities. Describe the general shape and expectations reflected by the curve d. what would a follower of the iquidity preference theory say about how the preferences of lenders and bomowers tend to aftect te shape of the yield curve in part c ewhat wold atolo o ofthe marint so me taton teo y say?out the sooty and demand fo 0 loans versus the supply and dn nd for shortterm loans g e the yeld an einpate The nonna rate orwer on te 20-year US Treasury bond s»% (Round to one deona place The nominal rate of interest on the 3-month U.S. Treasury bi is The nominal rate of interest on the 2-year US Treasury note is Round to one deoima place) The normnal rate ormterest on the 5-year US Treasury bond is LI%. (Round to one decirnal place ) b. f the real rate of interest suddenly hopped to 2% wthout any change in rtatonary expectaton OA. The nominal interest rate in each case would decrease by 05% () B. The nominal nterest rate r each case would rcrease by 0 5% Data Tab []% (Round to one deamal place) (Click on the icon located on the top-right corner of the data table below in order to copy ts coments nto a streadsheets Periodinflation 3 months 2 years 5 years 10 years 20 years 45% C. The nominal interest rate in each case would stay,the same D. The nomnal nterest rate n each case woud decrease by 2% E. The nominal rterest rate r, each case would noease by 296 5.5 7 5 8 5 c. Using your Indings in part a which of the foilowing graphs shows the appropriabe yield curve for the Print Done Click to select your answers) O Type here to searchExplanation / Answer
a. Formula for nominal interest rate is:
Nominal interest rate = real rate of interest+inflation premium+risk premium
Thus for the 3 month period the nominal interest rate = 2.5%+4.5% = 7.0%. Similarly all other rates have been computed:
The nominal rate of return on the 20 year U.S. Treasury bond is 11.0%.
The nominal rate of return on the 3 month U.S. Treasury bill is 7.0%.
The nominal rate of return on the 2 year U.S. Treasury note is 7.5%.
The nominal rate of return on the 5 year U.S. Treasury bond is 8.0%.
Period Real rate of interest Average annual rate of inflation Nominal rate of interest 3 months 2.50% 4.50% 7.0% 2 years 2.50% 5.00% 7.5% 5 years 2.50% 5.50% 8.0% 10 years 2.50% 7.50% 10.0% 20 years 2.50% 8.50% 11.0%