Nominal interest rates and yield curves A recent study of inflationary expectati

Question

Nominal interest rates and yield curves A recent study of inflationary expectations has revealed that the consensus among economic forecasters yields the following average annual rates of inflation expected over the periods noted:__________If the real rate of interest is currently 1.5%, find the nominal rate of interest on each of the following U.S. Treasury issues: 20-year bond, 3-month bill, 2-year note, and 5-year bond. If the real rate of interest suddenly dropped to 1 % without any change in inflationary expectations, what effect, if any, would this have on your answers in ? Using your findings in , select the appropriate yield curve for U.S. Treasury securities. Describe the general shape and expectations reflected by the curve. What would a follower of the liquidity preference theory say about how the preferences of lenders and borrowers tend to affect the shape of the yield curve in ? What would a follower of the market segmentation theory say about the supply and demand for long-term loans versus the supply and demand for short-term loans given the yield curve in ? The nominal rate of interest on the 20-year U.S. Treasury bond is squarebox%. (Round to one decimal place.) The nominal rate of interest on the 3-month U.S. Treasury bill is squarebox%. (Round to one decimal place.) The nominal rate of interest on the 2-year U.S. Treasury note is squarebox%. (Round to one decimal place.) The nominal rate of interest on the 5-year U.S. Treasury bond is squarebox%. (Round to one decimal place.) If the real rate of interest suddenly dropped to 1 % without any change in inflationary expectations, what effect, if any, would this have on your answers in ? The nominal interest rate in each case would decrease by 0.5%. The nominal interest rate in each case would increase by 0.5%. The nominal interest rate in each case would stay the same. The nominal interest rate in each case would decrease by 1%. The nominal interest rate in each case would increase by 1%.

Explanation / Answer

The formaule is
(1+real)*(1+inflation)=(1+nominal)
a)nominal rate of 20 year US tresury is

=([1+1.5%)*(1+7.5%)]-1=9.11%

b)([1+1.5%)*(1+2.5%)]-1=4.04%

c)([1+1.5%)*(1+3%)]-1=4.55%

d)([1+1.5%)*(1+4%)]-1=5.56%

b)Option A
Check it by decreasing to 1%

for us 20 year treasury bond the nominal rate now is
([1+1%)*(1+7.5%)]-1=8.58%
=9.11%-8.58%=0.5%

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