Chapter 6, Problem 19P

a.

Summary Introduction

To determine: Theaverage expected inflation rate.

Expected Inflation Rate:

The expected inflation rate is the rate at which the price is expected to increase over the time, which results in fall of the purchasing value.

Nominal Rate of Interest:

The nominal rate of interest is the annual rate which is charged on the securities. The nominal annual rate is converted into effective annual rate to compare the rates of two different banks.

b.

Summary Introduction

To determine: The average nominal interest rate.

c.

Summary Introduction

To determine: The interest rate in January 1981 on the bonds that has its maturity in 1,2, 5, 10 and 20 years and draw a yield curve on these data.

d.

Summary Introduction

To explain: The general economic conditions that can lead to an upward sloping yield curve.

e.

Summary Introduction

To determine: The shape of the yield curve in the given situation and the factors affecting the curve.