CFIN6
Spreadsheet Problem Solution
Chapter 5
a.
Years to
Real risk-free
Inflation
Maturity Risk
Treasury
Maturity
rate (r*)
Premium (IP)
Premium (MRP)
Yield
1
2.50%
8.00%
0.10%
10.60%
2
2.50%
7.00%
0.20%
9.70%
3
2.50%
6.00%
0.30%
8.80%
4
2.50%
5.25%
0.40%
8.15%
5
2.50%
5.20%
0.50%
8.20%
2.50%
4.10%
1.00%
7.60%
2.50%
3.55%
2.00%
8.05%
2.50%
3.37%
2.00%
7.87%
b. The yield curve is downward sloping, which suggests that the demand for short–term funds is greater than
the demand for long-term funds, the relative supply of short-term funds is lower than the supply of long-term
funds, or a combination of these situations exists.
7%
8%
9%
10%
11%
12%
CFIN6
c. After one year has passed:
Years to
Real risk-free
Inflation
Maturity Risk
Treasury
Maturity
rate (r*)
Premium (IP)
Premium (MRP)
Yield
0
1
2.50%
6.00%
0.10%
8.60%
2
2.50%
5.00%
0.20%
7.70%
3
2.50%
4.33%
0.30%
7.13%
4
2.50%
4.50%
0.40%
7.40%
9
2.50%
3.67%
0.90%
7.07%
2.50%
3.32%
1.90%
7.72%
2.50%
3.21%
2.00%
7.71%
After two years have passed:
Years to
Real risk-free
Inflation
Maturity Risk
Treasury
Maturity
rate (r*)
Premium (IP)
Premium (MRP)
Yield
-1
0
1
2.50%
4.00%
0.10%
6.60%
2
2.50%
3.50%
0.20%
6.20%
3
2.50%
4.00%
0.30%
6.80%
8
2.50%
3.38%
0.80%
6.68%
2.50%
3.17%
1.80%
7.47%
2.50%
3.11%
2.00%
7.61%
After three years have passed:
Years to
Real risk-free
Inflation
Maturity Risk
Treasury
Maturity
rate (r*)
Premium (IP)
Premium (MRP)
Yield
-2
-1
0
1
2.50%
3.00%
0.10%
5.60%
2
2.50%
4.00%
0.20%
6.70%
7
2.50%
3.29%
0.70%
6.49%
2.50%
3.12%
1.70%
7.32%
2.50%
3.07%
2.00%
7.57%
CFIN6
After four years have passed:
Years to
Real risk-free
Inflation
Maturity Risk
Treasury
Maturity
rate (r*)
Premium (IP)
Premium (MRP)
Yield
-3
-2
-1
5.00%
7.60%
3.33%
6.43%
3.08%
7.58%
After five years have passed:
Years to
Real risk-free
Inflation
Maturity Risk
Treasury
Maturity
rate (r*)
Premium (IP)
Premium (MRP)
Yield
-4
-3
-2
-1
3.00%
6.00%
3.00%
7.00%
3.00%
7.50%
d. Yields on AAA-rated bonds and B-rated bonds:
Years to
Maturity
Real Risk-
Free Rate
Inflation
Premium (IP)
Maturity Risk
Premium
(MRP)
Treasury
Yield
AAA
Rating
DRP
AAA-
Rated
Bond
Yield
B-
Rating
DRP
B-Rated
Bond
Yield
1
2.50%
8.00%
0.10%
10.60%
1.50%
12.10%
4.00%
14.60%
2
2.50%
7.00%
0.20%
9.70%
1.53%
11.23%
4.08%
13.78%
3
2.50%
6.00%
0.30%
8.80%
1.56%
10.36%
4.16%
12.96%
4
2.50%
5.25%
0.40%
8.15%
1.59%
9.74%
4.24%
12.39%
5
2.50%
5.20%
0.50%
8.20%
1.62%
9.82%
4.33%
12.53%
10
2.50%
4.10%
1.00%
7.60%
1.79%
9.39%
4.78%
12.38%
20
2.50%
3.55%
2.00%
8.05%
2.19%
10.24%
5.83%
13.88%
30
2.50%
3.37%
2.00%
7.87%
2.66%
10.53%
7.10%
14.97%