Problem 6-30 Yield Curve (LO4)The following table shows the prices of a sample of Treasury strips. Each strip makes a single payment at maturity. Years to MaturityPrice, (% of face value)198.652%295.151 391.344 487.280 d. What is the 4-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)e. Is the yield curve upward-sloping, downward-sloping, or flat?f. Is this the usual shape of the yield curve?

Given information : Face value 100 Year 1 price 98.652 Year 2 price 95.151 Year 3 price…

Answered: he following table shows the prices of…

Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN:9781337395250

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter6: Interest Rates

Section: Chapter Questions

Problem 20SP: INTEREST RATE DETERMINATION AND YIELD CURVES a. What effect would each of the following events...

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Problem 6-30 Yield Curve (LO4)

The following table shows the prices of a sample of Treasury strips. Each strip makes a single payment at maturity.

Years to Maturity	Price, (% of face value)
1	98.652	%
2	95.151
3	91.344
4	87.280

d. What is the 4-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

e. Is the yield curve upward-sloping, downward-sloping, or flat?

f. Is this the usual shape of the yield curve?

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INTEREST RATE DETERMINATION AND YIELD CURVES a. What effect would each of the following events likely have on the level of nominal interest rates? 1. Households dramatically increase their savings rate. 2. Corporations increase their demand for funds following an increase in investment opportunities. 3. The government runs a larger-than-expected budget deficit. 4. There is an increase in expected inflation. b. Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, A-rated corporate bond. The current real risk-free rate is 4%; and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0 02(t 1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium (DRP), given the companys bond rating, from the table below. Remember to subtract the bonds LP from the corporate spread given in the table to arrive at the bonds DRP. What yield would you predict for each of these two investments? Rate Corporate Bond Yield Spread = DRP + LP U.S. Treasury 0.83% ---- AAA corporate 0.93 0.10% AA corporate 1.29 0.46 A corporate 1.67 0.84 c. Given the following Treasury bond yield information, construct a graph of the yield curve. Maturity Yield 1 year 5.37% 2 years 5.47 3 years 5.65 4 years 5.71 5 years 5.64 10 years 5.75 20 years 6.33 30 years 5.94 d. Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. e. Which part of the yield curve (the left side or right side) is likely to be most volatile over time? f. Using the Treasury yield information in part c, calculate the following rates using geometric averages: 1. The 1-year rate 1 year from now 2. The 5-year rate 5 years from now 3. The 10-year rate 10 years from now 4. The 10-year rate 20 years from now

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he following table shows the prices of a sample of Treasury strips. Each strip makes a single payment at maturity. Years to Maturity Price, (% of face value) 1 98.652 % 2 95.151 3 91.344 4 87.280

Problem 6-30 Yield Curve (LO4)