A RECENT STUDY OF INFLATIONARY EXEPECTATION/TUTORIALOUTLET DOT COM A RECENT STUDY OF INFLATIONARY EXEPECTATION/TUTORI | Page 2

a. If the real rate of interest is currently 2.5%, find the nominal rate of
interest on each of the following U.S. Treasury issues: 20-year bond,
3-month bill, 2-yearnote, and 5-year bond.
b. If the real rate of interest suddenly dropped to 2% without any
change in inflationary expectations, what effect, if any, would it have
on your answers in part a? Explain.
c. Using your findings in part a, draw a yield curve for U.S. Treasury
securities.Describe the general shape and expectations reflected by the
curve.
d. What would a follower of the liquidity preference theory say about
how the preferences of lenders and borrowers tend to affect the shape
of the yield curve drawn in part c? Illustrate that effect by placing on
your graph a dotted line that approximates the yield curve without the
effect of liquidity preference.
e. What would a follower of the market segmentation theory say
about the supply and demand for long-term loans versus the supply
and demand for short-term loans given the yield curve constructed for
part c of this problem?
P6–11 Bond prices and yields Assume that the Financial Management
Corporation’s$1,000-par-value bond had a 5.700% coupon, matures
on May 15, 2023, has a current price quote of 97.708, and has a yield
to maturity (YTM) of 6.034%. Given this information, answer the
following questions:
a. What was the dollar price of the bond?
b. What is the bond’s current yield?
c. Is the bond selling at par, at a discount, or at a premium? Why?
d. Compare the bond’s current yield calculated in part b to its YTM
and explain
P6-17 Bond value and changing required returns Midland Utilities
has outstanding a bond issue that will mature to its $1,000 par value