Principles of Managerial Finance

a. Using the preceding data, find the real rate of interest at each point in time.

b. Describe the behavior of the real rate of interest over the year. What forces

might be responsible for such behavior?

c. Draw the yield curve associated with these data, assuming that the nominal

rates were measured at the same point in time.

d. Describe the resulting yield curve in part c,and explain the general expecta-

tions embodied in it.

6–7 Term structure of interest rates The following yield data for a number of high-

est quality corporate bonds existed at each of the three points in time noted.

a. On the same set of axes, draw the yield curve at each of the three given times.

b. Label each curve in part awith its general shape (downward-sloping,

upward-sloping, flat).

c. Describe the general inflationary and interest rate expectation existing at

each of the three times.

6–8 Risk-free rate and risk premiums The real rate of interest is currently 3%; the

inflation expectation and risk premiums for a number of securities follow.

a. Find the risk-free rate of interest, RF,that is applicable to each security.

b. Although not noted, what factor must be the cause of the differing risk-free

rates found in part a?

c. Find the nominal rate of interest for each security.

6–9 Risk premiums Eleanor Burns is attempting to find the nominal rate of interest

for each of two securities—A and B—issued by different firms at the same point

in time. She has gathered the following data:

Inflation expectation

Security premium Risk premium

A6% 3%

B9 2

C8 2

D5 4

E11 1

Yield

Time to maturity (years) 5 years ago 2 years ago Today

1 9.1% 14.6% 9.3%

3 9.2 12.8 9.8

5 9.3 12.2 10.9

10 9.5 10.9 12.6

15 9.4 10.7 12.7

20 9.3 10.5 12.9

30 9.4 10.5 13.5

298 PART 2 Important Financial Concepts

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