Fundamentals of Financial Manageme...
Solutions
Fundamentals of Financial Manageme...
YIELD CURVES Assume that yields on U.S. Treasury securities were as follows:
| Term | Rate |
| 6 months | 4.69% |
| 1 year | 5.49 |
| 2 years | 5.66 |
| 3 years | 5.71 |
| 4 years | 5.89 |
| 5 years | 6.05 |
| 10 years | 6.12 |
| 20 years | 6.64 |
| 30 years | 6.76 |
- a. Plot a yield curve based on these data.
- b. What type of yield curve is shown?
- c. What information 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.
a.
To prepare: The yield curve.
Yield Curve: The graphical representation of expected return, provided by the company to its investors during the year is known as yield curve.
The expected yield curve
Fig 1
b.
To identify: The type of yield curve of the given data.
Normal Yield Curve:
A yield curve, which shows the low yield for the short-term bonds and high yield for the long-term debt is known as a normal yield curve.
c.
To identify: The analysis derived from the graph.
d.
To explain: Whether the better option is to borrow short-term debt or the long-term debt.
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