The following table shows the prices of a sample of Treasury strips. Each strip

Question

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 97.452 % 2 93.951 3 90.144 4 86.080

a. What is the 1-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

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

c. What is the 3-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

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? Upward-sloping Downward-sloping Flat f. Is this the usual shape of the yield curve? Yes No

Explanation / Answer

I have used assumed Face value to be $ 100. We are given face value to be $ 100

Year

Price

1

97.452

2

93.951

3

90.144

4

86.08

Use financial calculator with the following inputs to calculate I/Y (interest rate):

a) PV=-97.452 FV=100 PMT=0 n=1. Therefore, I/Y=2.6146%

b) PV=-93.951 FV=100 PMT=0 n=2. Therefore, I/Y= 3.1690%

c) PV=-90.144 FV=100 PMT=0 n=3. Therefore, I/Y= 3.5192%

d) PV=-86.08 FV=100 PMT=0 n=4. Therefore, I/Y= 3.8184%

e) The yield curve is upward sloping (higher maturity higher yield). Yes this is the usual shape of the yield curve.

Year

Price

1

97.452

2

93.951

3

90.144

4

86.08

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