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) 98.552% 95.051 91.244 87.180 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? f. Is this the usual shape of the yield curve? a. Interest rate b. Interest rate C. Interest rate d. Interest rate e. Is the yield curve upward-sloping, downward-sloping, or flat? f. Is this the usual shape of the yield curve?

Answer 1

Years to Maturity	Face Value	Price (% of Face Value)	Return (Face Value -Price	%Return (Return/Price*100)	Annual Return (%Return/Years to maturity)
1	100	98.552	1.448	1.47%	1.47%
2	100	95.051	4.949	5.21%	2.60%
3	100	91.244	8.756	9.60%	3.20%
4	100	87.18	12.82	14.71%	3.68%

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Part	Particulars	Answers
a	Interest Rate	1.47%
b	Interest Rate	2.60%
c	Interest Rate	3.20%
d	Interest Rate	3.68%
e	Is the yeild curve upward sloping , downward sloping or flat	The yeild curve is upward sloping.
f	Is this the usual slope of the yeild cuve	A yield curve is typically upward sloping .The reason for that is that debt issued for a longer term generally carries greater risk because of the greater likelihood of inflation or default in the long run.