Term structure of interest rates The llowing yield data for a number of highest

Question

Term structure of interest rates The llowing yield data for a number of highest quality corporate bonds existed at each of the three points in tme noted in the folowing tabe d.Examne te datafon 5 years ago Acowang tothe expectations theory w at acorernate reun dd Mnors expect . 5-year bond to pay ?§ ofteday? O c Today 5 yrs ago yrs ago2 ys o yrs ag0 Tody oday ne to Maturity ear Data Table Answer he following questions about the general shape of each curve in parta What was the shape of the yd curve 5 yeans ag0? (Seledt the best answer bellow) O A Fat O C. Downwand-sloping What was the shape of he yld curve 2 years ago? (Select the best anr below) Cick to select your anser (oo on?icon ocated onthe noognt corner ofthe data tatue below noo. opy its contents into a spreadsneet Time to matuity 5 years ago ago 2 years ag0 Today 11.0 7.6 8.7 6 8 69 7.1 89 105 10.7 15 10 87

Explanation / Answer

Answer A: Time to maturity 5 Year ago 2Year ago Today 1 6.8 12.8 7.1 3 6.9 11 7.6 5 6.8 10.4 8.7 10 6.9 9.1 10.4 15 6.9 8.9 10.5 20 7.2 8.7 10.7 30 7.1 8.7 11.3 When we plot the data on graph paper we can see that. Graph in option C is correct AnswerA:option C Answer B: Shape of 5 year yield curve: A: Flat As we can see that cure move in same direction with very least upward and downward movement.And it is kind of parallel to X axis thus we can say that 5 Year yield curve is flat Shape of 2 Year yield curve C:downward sloping As we can see that curve is falling down .Thus we can say that it is a downward sloping curve Shape of today curve B: upward sloping As we can see that curve is moving in upward direction. Thus we can say that it is a upward sloping curve. Answer c: Time to maturity 5 Year ago 2Year ago Today 1 6.8 12.8 7.1 3 6.9 11 7.6 5 6.8 10.4 8.7 10 6.9 9.1 10.4 15 6.9 8.9 10.5 20 7.2 8.7 10.7 30 7.1 8.7 11.3 Total 48.6 69.6 66.3 General interest rate=sum of interest/n n=7 5 year ago= 48.6/7 = 6.942857 2 Year ago= 69.6/7 = 9.942857 today= 66.3/7 = 9.471429 Answer D: Interest for 2 year= ((1+rate of 3year)power3/1+1year rate)-1 = (1+0.069)power3/1+0.068)-1 = (1.221612/1.068)-1 = 0.143831 Interest for today= ((1+rate of 2year)power2/1+1year rate)-1 = ((1+0.143831)power2/1.+0.068)-1 = (1.308349/1.068)-1 = 0.225046 Interest today= 22.50459 %

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