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The risk free rate on T-bills recently was 123% If the real rate if interest is estimated to be 0 80% what was the expected level of inflation E62 The yields for Treasuries with differing

The risk-free rate on T-bills recently was 1.23%. If the real rate if interest is estimated to be 0.80%, what was the expected level of inflation? E6-2. The yields for Treasuries with differing maturities on a recent day were as shown in the table on page 253. a. Use the information to plot yield curve for this date. b. If the expectations hypothesis is true, approx. what rate of return do investors expect a 5 yr Treasury note to pay 5 yrs from now? Maturity Yield 3 months 1.41% 6 months 1.71% 2 years 2.68 3 years 3.01 5 years 3.70 10 years 4.51 30 years 5.25 c. If the expectations hypothesis is true, approx. (ignoring compounding) what rate of return do investors expect a 1 – year Treasury security to pay starting 2 years from now? d. Is it possible that even through the yield curve slopes up in this problem, investors do not expect rising interest rates? Explain. E6-3. The yields for Treasuries with differing maturities, including estimate of the real rate of interest, on a recent day were as shown in the following table: Maturity Yield Real rate of Interest 3 Mo. 1.41% 0.80% 6 Mo. 1.71 0.80 2 yrs 2.68 0.80 3 yrs 3.01 0.80 5 yrs 3.07 0.80 10 yrs 4.51 0.80 30 yrs 5.25 0.80 Use the information in the preceding table to calculate the inflation expectation for each maturity. E6-4. Recently, the annual inflation rate measured by the Consumer Price Index Table (CPI) was forecast to be 3.3%. How could a T-Bill have had a negative real rate of return over the same period? How could it have has a zero real rate of return? What minimum rate of return must the T-bill have esarned to meet your requirement of a 2% real rate of return? E6-5. Calculate the risk premium for each of the following rating classes of long term securities, assuming that the yield to maturity (YTM) for comparable Treasuries is 4.51%. Rating Class Nominal interest rate AAA 5.12% BBB 5.78 B 7.82

 

May 01 2020 View more View Less

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