CFIN6
Chapter 5 Spreadsheet Problem
The Cost of Money (Interest Rates)
The problem requires you to use File C05 on the computer problem spreadsheet.
a. Assume the expected inflation rates for the next five years are as follows:
Year Inflation Rate
1 8.0%
2 6.0
In Year 6 and thereafter, inflation is expected to be 3 percent. The maturity risk premium (MRP) is
0.1 percent per year to maturity for bonds with maturities greater than six months, with a maximum
years. Draw the yield curve.
b. Discuss the yield curve that is constructed from the results in part (a).
c. Rework part (a) assuming one year has passed—that is, today is January 1 of Year 2. All the other