Treasury Yield Curve Coursework Example | Topics and Well Written Essays - 750 words

Treasury Yield Curve - Coursework interpreterInflation affects purchasing power of money and therefore has a major effect on pursuance calculates. Therefore if inflation rate is expected to be 1% during the next year this is added to the gamble light pursuance rate (say 3.5%) and so the Treasury bill rate will be rT-bill = rRF = r* + IP = 3.5% + 1% = 4.5% The inflation rate is the main factor which determines the shape of the exchequer impart carousal. If the inflation rate is expected to increase, then the treasury yield curve will ramp upwards which is normal. On the different hand, if the inflation rate is expected to decrease, then this will cause the treasury yield curve to slope downwards. Another factor affecting the Treasury bill rate is interest rate risk. When interest range rises the prices of treasury bonds decline sharply and since this is a regular occurrence all long term bonds including treasury bonds have an element of interest rate risk. A maturity risk p remium (say 2.5%) is therefore added to the risk free rate resulting in the following formula for calculating the Treasury bill rate. rT-bill = rRF = r* + IP + MRP. = 3.5% + 1% + 2.5 = 7% This premium increases with the time to maturity. Therefore, the longer the period the higher maturity risk premium. ... This data tells me that interest rates be subject to various economic conditions that will cause it to rise or fall and that the trend does not have to be continuous as it would appear from the examples seen. This yield curve has a dip and a hump indicating that the interest rates on one year maturities are higher than interest rates on 5 year maturities. The interest rates on modal(a) term maturities rises constantly between year 6 and year 20 and then falls resulting in interest rates on some long term maturities being much lower than the interest rates on some in the medium term. equivalencet 2 Yield to Maturity The yield to maturity is the annualized discount rate that eq uates the future coupon and payments to the future coupon and principal payments to the initial product received from the bond offering (Madura 2006, p157). Consider Wal-Mart bond which matures on July 2015 with coupon rate of 2.25% which is paid semi-annually. The place of a bond (Vb) is found using the following formula. Vb = 1000 = $11.25/(1 + rd/2)1 + $11.25/(1 + rd/2)2 + $11.25/(1 + rd/2)3 + $11.25/(1 + rd/2)4 + $11.25/(1 + rd/2)5 + $11.25/(1 + rd/2)6 + $11.25/(1 + rd/2)7 + $11.25/(1 + rd/2)8 + $11.25/(1 + rd/2)9 + $11.25/(1 + rd/2)10 + $1,0001/(1 + rd/2)10 The PV table can be use to find the figures for each of the ten six-monthly period where $11.25 is the half yearly coupon rate. The time to maturity is cardinal years and so Wal-Mart 2.25% Corporate Bond Time Periods Interest Payment Maturity Payment integrality cash Flow PV Factor (1.125%) PV of Cash Flow $ $ $ $000 0 1000 1 1000 Par Value of Bond 1 11.25 11.25 0.9889 11.1251 2 11.25 11.25 0.9779 11.0014 3 11.25 11.25 0.967 10.8788 4 11.25 11.25