YIELD CURVES Yields on U.S. Treasury securities were as follows: Term Rate 6 months 5.1% 1 year 5.5.

YIELD CURVES Yields on U.S. Treasury securities were as follows: Term Rate 6 months 5.1% 1 year 5.5 2 years 5.6 3 years 5.7 4 years 5.8 5 years 6.0 10 years 6.1 20 years 6.5 30 years 6.3 a. Plot a yield curve based on these data. b. What type of yield curve is shown? c. What information does this graph tell you? d. Based on this yield curve, if you needed to borrow money for longer than 1 year, would it make sense for you to borrow short term and renew the loan or borrow long term? Explain. 2. REAL RISK-FREE RATE You read in The Wall

YIELD CURVES Yields on U.S. Treasury securities were as follows: Term Rate 6 months 5.1% 1 year 5.5 2 years 5.6 3 years 5.7 4 years 5.8 5 years 6.0 10 years 6.1 20 years 6.5 30 years 6.3 a. Plot a yield curve based on these data. b. What type of yield curve is shown? c. What information does this graph tell you? d. Based on this yield curve, if you needed to borrow money for longer than 1 year, would it make sense for you to borrow short term and renew the loan or borrow long term? Explain. 2. REAL RISK-FREE RATE You read in The Wall Street Journal that 30-day T-bills are currently yielding 5 5%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums: Inflation premium= 3 25% Liquidity premium = 0 6% Maturity risk premium = 1 8% Default risk premium = 2 15% On the basis of these data, what is the real risk-free rate of return? 3. EXPECTED INTEREST RATE The real risk-free rate is 3%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities? 4. DEFAULT RISK PREMIUM A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate bond has a yield of 8%. Assume that the liquidity premium on the corporate bond is 0 5%. What is the default risk premium on the corporate bond? 5. MATURITY RISK PREMIUM The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6 2%. What is the maturity risk premium for the 2-year security? If any formulas or equations can be given, that would be helpful. I want correct answers, but I also want to know how to arrive at the answers so I can survive in this class.