# Yield on Bonds

1. If U.S. Treasury yields are as follows:

3 month 6.0%

6 month 6.3%

1 year 6.5%

2 year 6.6%

5 year 6.4%

10 year 7.5%

30 year 8.0%

a. What is the expected yield on notes from year 1 to 2, assuming the PEH holds?

b. What is the expected yield on notes from year 2 to 5, assuming the PEH holds?

c. If inflation for the next year is expected to be 4.5%, what would the expected real rate of interest be on the 3-month T-bill?

d. If inflation spikes during this period, and the actual inflation rate comes in ex-post at 6.3%, what would the actual real rate of interest be on the 3-month Treasury bill?

e. It the expectations for inflation are as follows:

Years 1 and 2 4.5%

Years 3 to 6 4.0%

Years 7 to 15 3.5%

Years 16 to 30 3.2%

Assume the following for the MRP: Years 1 to 10 .1%

Years 11 to 20 .05%

Years 20 on 0%

What is the real rate of return on the 30 year T-Bond? On the 10 year bond?

f. Using the information from part e, and assuming a real rate of return of 3%, what would the nominal rate of return be on a 15-year Treasury bond ?

g. Plot the yield curve for these Treasury securities.

h. Using the three theories we have discussed, explain how each one helps explain the shape of this yield curve.

2. If the listed bonds have the following returns, identify the combined DRP & LP's. (assume that there is no ISP. ) Use the Treasuries above as your benchmarks.

AAA 10 year 11%

BBB 30 year 15%

B 5 year 12.5%

---

(See attached files for full problem description)

#### Solution Summary

Calculates the yield on treasury securities and plots the yield curve.