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123456 Assume that the real risk-free rate of return, pis 3 percent, and it will remain at that level far into the future. Al
b. Plot the yield curve for the interest rate rates you computed in in part a. Hint: Complete the following table from part a
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in %
Bond Year Inflation rate Real Risk free rate (k) Cumulatative Inflation Avg Expected Inflation Rate(IP) Avg Nominal Interest Rate (K+IP) Maturity Risk Premium Estimated Interest Rate
1 3 3 3 3 6 0.2 6.2
2 5 3 8 4 7 0.4 7.4
3 4 3 12 4 7 0.6 7.6
4 8 3 20 5 8 0.8 8.8
5 3 3 23 4.6 7.6 1 8.6
10 2 3 25 2.5 5.5 1 6.5
20 2 3 27 1.35 4.35 1 5.35

A Yield Curve Yield to Maturity Time to Maturity

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