Yield Curve
Yield Curve
Yield Curve
YIELD CURVES
TERM RATE
6 months 4.69%
1 year 5.49% YIELD CURVE
2 years 5.66%
8.00%
3 years 5.71%
4 years 5.89% 7.00% 6.76%
6.64%
6.00% 6.05% 6.12%
5 years 6.05% 5.49% 5.66% 5.71% 5.89%
10 years 6.12% 5.00%
4.69%
20 years 6.64% 4.00%
30 years 6.76% 3.00%
2.00%
1.00%
0.00%
6 months 1 year 2 years 3 years 4 years 5 years 10 years 20 years 30 years
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.
In general, it makes sense to borrow for a short period of time because the interest rate will be lower each
You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.8%. Your brother-in-law, a broker at S
Securities, has given you thefollowing estimates of current interest rate premiums:
Given:
T-bill yield (rRF) = 5.8%
Inflation premium (IP) = 3.25%
Liquidity premium (LP) = 0.6%
Maturity risk premium (MRP) = 1.85%
Default risk premium (DRP) = 2.15%
On the basis of these data, what is the real risk-free rate of return?
rRF = r* + IP
5.8 % = r* + 3.25 %
5.8 % - 3.25 % = r*
r= 2.55%