# Interest and Real Rate Essay

P6–2 Real rate of interest To estimate the real rate of interest, the economics division of Mountain Banks—a major bank holding company—has gathered the

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U.S. Treasury Nominal rate Inflationary security Point in time Maturity of interest expectation

A Jan. 7 2 years 12.6% 9.5%

B Mar. 12 10 years 11.2 8.2

C May 30 6 months 13.0 10.0

D Aug. 15 20 years 11.0 8.1

E Dec. 30 5 years 11.4 8.3

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 expectations embodied in it.

P6–7 Term structure of interest rates The following yield data for a number of highestquality corporate bonds existed at each of the three points in time noted.

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