Question

Use the following information to draw XYZ's yield curve, using:

- Average real risk free rate of return is constant over 30 years at 1%

- Inflation rate over 30 years is expected to be 4% in the first five years, 2% in year 6-15, and 1% in year 16-30

- DRP is constant at 1.5%

- LP is constant at 0.5%

- MRP derived from MRP=(t-1)*0.1%

Answer 1

According to the information given:

each data is calculated and YTM is equal to = real risk free rate + Inflation + DRP + LP + MRP

MRP for example is calculated as follows:

year 5 = (5 - 1 ) * 0.1% = 0.4%

Year 10 = (10 -1 ) * 0.1% = 0.9%

Year	real	inflation rate	DRP	LP	MRP	ytm
1	1%	4%	1.50%	0.50%	0	7.00%
2	1%	4%	1.50%	0.50%	0.001	7.10%
3	1%	4%	1.50%	0.50%	0.002	7.20%
4	1%	4%	1.50%	0.50%	0.003	7.30%
5	1%	4%	1.50%	0.50%	0.004	7.40%
6	1%	2%	1.50%	0.50%	0.005	5.50%
7	1%	2%	1.50%	0.50%	0.006	5.60%
8	1%	2%	1.50%	0.50%	0.007	5.70%
9	1%	2%	1.50%	0.50%	0.008	5.80%
10	1%	2%	1.50%	0.50%	0.009	5.90%
11	1%	2%	1.50%	0.50%	0.01	6.00%
12	1%	2%	1.50%	0.50%	0.011	6.10%
13	1%	2%	1.50%	0.50%	0.012	6.20%
14	1%	2%	1.50%	0.50%	0.013	6.30%
15	1%	2%	1.50%	0.50%	0.014	6.40%
16	1%	1%	1.50%	0.50%	0.015	5.50%
17	1%	1%	1.50%	0.50%	0.016	5.60%
18	1%	1%	1.50%	0.50%	0.017	5.70%
19	1%	1%	1.50%	0.50%	0.018	5.80%
20	1%	1%	1.50%	0.50%	0.019	5.90%
21	1%	1%	1.50%	0.50%	0.02	6.00%
22	1%	1%	1.50%	0.50%	0.021	6.10%
23	1%	1%	1.50%	0.50%	0.022	6.20%
24	1%	1%	1.50%	0.50%	0.023	6.30%
25	1%	1%	1.50%	0.50%	0.024	6.40%
26	1%	1%	1.50%	0.50%	0.025	6.50%
27	1%	1%	1.50%	0.50%	0.026	6.60%
28	1%	1%	1.50%	0.50%	0.027	6.70%
29	1%	1%	1.50%	0.50%	0.028	6.80%
30	1%	1%	1.50%	0.50%	0.029	6.90%

Only Column 1 and 7 is used to create the chart as follows:

Select column 1 and 2 and then go to insert chart, select scatter with smooth lines and marker.

ytm 8.00% 7.00% 5.00% 4.00% 3.00% 1.00% 30 35 20 10 1% 0

With axis marked.

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