Q#9. Suppose you and most other investors expect the inflation rate to be 7% next year, to fall to 5% during the following year, and then to remain at a rate of 3% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on Treasury securities rise from zero on very short-term securities (those that mature in a few days) to a level of 0.2 percentage points for 1-year securities. Furthermore, maturity risk premiums increase 0.2 percentage points for each year to maturity, up to a limit of 1.0 percentage point on 5-year or longer-term T-notes and T- bonds. A. Calculate the interest rate on 1-, 2-, 3-, 4-, 5-, 10-, and 20-year Treasury securities, and plot the yield curve. B. Now suppose MARS Company's bonds, rated AAA, have the same maturities as the Treasury bonds, while the spread is 1.1%.. As an approximation, plot a MARS company's yield curve on the same graph with the Treasury bond yield curve. C. Again, suppose MERN Company's bonds, rated CCC, have the same maturities as the Treasury bonds, while the spread is 5.3%.. As an approximation, plot a MERN company's yield curve on the same graph with the Treasury bond yield curve.
Q#9. Suppose you and most other investors expect the inflation rate to be 7% next year, to fall to 5% during the following year, and then to remain at a rate of 3% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on Treasury securities rise from zero on very short-term securities (those that mature in a few days) to a level of 0.2 percentage points for 1-year securities. Furthermore, maturity risk premiums increase 0.2 percentage points for each year to maturity, up to a limit of 1.0 percentage point on 5-year or longer-term T-notes and T- bonds. A. Calculate the interest rate on 1-, 2-, 3-, 4-, 5-, 10-, and 20-year Treasury securities, and plot the yield curve. B. Now suppose MARS Company's bonds, rated AAA, have the same maturities as the Treasury bonds, while the spread is 1.1%.. As an approximation, plot a MARS company's yield curve on the same graph with the Treasury bond yield curve. C. Again, suppose MERN Company's bonds, rated CCC, have the same maturities as the Treasury bonds, while the spread is 5.3%.. As an approximation, plot a MERN company's yield curve on the same graph with the Treasury bond yield curve.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Q#9.
7% next year, to fall to 5% during the following year, and then to remain at a rate of 3%
thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk
premiums on Treasury securities rise from zero on very short-term securities (those that
mature in a few days) to a level of 0.2 percentage points for 1-year securities.
Furthermore, maturity risk premiums increase 0.2 percentage points for each year to
maturity, up to a limit of 1.0 percentage point on 5-year or longer-term T-notes and T-
bonds.
Suppose you and most other investors expect the inflation rate to be
A. Calculate the interest rate on 1-, 2-, 3-, 4-, 5-, 10-, and 20-year Treasury securities,
and plot the yield curve.
B. Now suppose MARS Company's bonds, rated AAA, have the same maturities as the
Treasury bonds, while the spread is 1.1%.. As an approximation, plot a MARS
company's yield curve on the same graph with the Treasury bond yield curve.
C. Again, suppose MERN Company's bonds, rated CCC, have the same maturities as
the Treasury bonds, while the spread is 5.3%.. As an approximation, plot a MERN
company's yield curve on the same graph with the Treasury bond yield curve.
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