# Treasury Bills Returns and Inflation

Calculating Returns

Refer to the following table:

Year T-Bill Return Inflation

1973 0.0729 0.0871

1974 0.0799 0.1234

1975 0.0587 0.0694

1976 0.0507 0.0486

1977 0.0545 0.0670

1978 0.0764 0.0902

1979 0.1056 0.1329

1980 0.1210 0.1252

Requirement 1:

Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period. (Do not include the percent sign (%). Round answers to 2 decimal places, e.g. 32.16.)

Average Treasury bill return percent

Average inflation percent

Requirement 2:

Calculate the standard deviation of Treasury bill returns and inflation over this period. (Do not include the percent sign (%). Round to 2 decimal places, e.g. 32.16.)

Standard deviation

T-bills percent

Inflation percent

Requirement 3:

Calculate the average real return for Treasury bills over this period. (Negative amount should be indicated by a minus sign. Do not include the percent sign (%). Round answers to 2 decimal places, e.g. 32.16.)

Average real return ______ percent

Please see attached file with problem.

© BrainMass Inc. brainmass.com October 16, 2018, 9:12 pm ad1c9bdddfhttps://brainmass.com/business/payback-period-and-discounted-payback-period/treasury-bills-returns-inflation-175625

#### Solution Preview

Please see attached file for complete answer.

Calculating Returns

Refer to the following table:

Year T-Bill Return Inflation

1973 0.0729 0.0871

1974 0.0799 0.1234

1975 0.0587 0.0694

1976 0.0507 0.0486

1977 0.0545 0.0670

1978 0.0764 0.0902

1979 0.1056 0.1329

1980 0.1210 0.1252

Requirement 1:

Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period. (Do not include the percent sign (%). Round answers to 2 decimal places, e.g. 32.16.)

Average Treasury bill return percent

Average inflation percent

Requirement 2:

Calculate the standard deviation of Treasury bill returns and inflation over this period. (Do not include the percent sign (%). Round to 2 decimal places, e.g. 32.16.)

Standard deviation

T-bills percent

Inflation percent

Requirement 3:

Calculate the average real return for Treasury bills over this period. (Negative amount should be indicated by a minus sign. Do not include the percent sign (%). Round answers to 2 decimal places, e.g. 32.16.)

Average real return ______ ...

#### Solution Summary

The solution:

1) Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index).

2) Calculates the standard deviation of Treasury bill returns and inflation.

3) Calculates the average real return for Treasury bills.

Risk/Return, Yield Curve, Interest and Inflation Rates

4. Risk and return

Your uncle would like to restrict his interest rate risk and his default risk, but he would still like to invest in corporate bonds. Which of the possible bonds listed below best satisfies your uncle's criteria?

AAA bond with 10 years to maturity.

BBB perpetual bond.

BBB bond with 10 years to maturity.

AAA bond with 5 years to maturity.

BBB bond with 5 years to maturity.

5. Yield curve

If the yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury coupon bond, relative to that on a 1-year T-bond? The yield on the 10-year bond is less than the yield on a 1-year bond.

The yield on a 10-year bond will always be higher than the yield on a 1-year bond because of maturity premiums.

It is impossible to tell without knowing the coupon rates of the bonds.

The yields on the two bonds are equal.

It is impossible to tell without knowing the relative risks of the two bonds.

7. Interest rates

Assume interest rates on long-term government and corporate bonds were as follows:

T-bond = 7.72% A = 9.64%

AAA = 8.72% BBB = 10.18%

The differences in rates among these issues were caused primarily by:

Tax effects.

Default risk differences.

Maturity risk differences.

Inflation differences.

Answers b and d are correct.

10. Inflation rate

You are given the following data:

r* = real risk-free rate = 4%

Constant inflation premium = 7%

Maturity risk premium = 1%

Default risk premium for AAA bonds = 3%

Liquidity premium for long-term T-bonds = 2%

Assume that a highly liquid market does not exist for long-term T-bonds, and the expected rate of inflation is a constant. Given these conditions, the nominal risk-free rate for T-bills is _____, and the rate on long-term Treasury bonds is _____.

Hint: [rRF = r* + IP]

[r Nom = (r* + IP) + DRP + LP + MRP]

4%; 14%.

4%; 15%.

11%; 14%.

11%; 15%.

11%; 17%.