1. As household savings increase, the supply curve will be shifted to the right. Thus, interest rates will decrease.

2. Demand curve will be shifted to the right if there is an increase in demand for funds. This results to increase of
3. If the government's budget deficit becomes larger, it will cause the demand curve to be shifted to the right. This
4. Nominal interest rates are directly impacted by inflation. Therefore, if there is an increase in inflation, there wil
s, interest rates will decrease.
nds. This results to increase of interest rates.
e to be shifted to the right. This will also lead to government to borrow funds which can result, again, in increase of interest ra
increase in inflation, there will be also an increase in interest rates.
again, in increase of interest rates.
Treasury Bond

Years Rate
2 2% 4%
4 3% 12%
6 4% 24%
12 40%

Inflation Rate 3.33%

T = risk-free rate + inflation rate + maturity risk premium

T = 4% + 3.33% + (0.02*(12-1)%)
T = 7.55%

A-rated Corporate Bond

Inflation Rate
Years Rate
2 2% 4%
4 3% 12%
1 4% 4%
7 20%

Inflation Rate 2.86%

C = risk-free rate + inflation rate + maturity risk premium + default risk premium + liquidity premium
C = 4% + 2.86% + (0.02*(7-1)%) + (0.84%-0.3%) + 0.3%
C = 7.82%
+ liquidity premium
Maturity in Years Yield
1 5.37%
Yield Curve of Treasury Bo
6.60%
2 5.47%
6.40%
3 5.65%
4 5.71% 6.20%

Annual Yield
5 5.64% 6.00%
10 5.75% 5.80%
20 6.33% 5.60%
30 5.94% 5.40%
5.20%
5.00%
4.80%
0 5 10 15 20

Maturity in Years
urve of Treasury Bond

15 20 25 30 35

Maturity in Years
A-rated Corporate Bond

Inflation Maturity in T-Bond C-Bond

Year Rate Rate Years Yield Yield
1 1st 2% 2.00% 1 5.37% 6.84%
2 2nd 2% 2.00% 2 5.47% 6.86%
3 3rd 3% 2.33% 3 5.65% 7.21%
4 4th 3% 2.50% 4 5.71% 7.40%
5 5th 3% 2.60% 5 5.64% 7.52%
10 10th 4% 3.20% 10 5.75% 8.22%
20 20th 4% 3.60% 20 6.33% 8.82%
30 30th 4% 3.73% 30 5.94% 9.15%

C = risk-free rate + inflation rate + maturity risk premium + default risk premium + liquidity premium
1st year 5th year
C = 4% + 2% + (0.02*(1-1)%) + (0.84%-0.3%) + 0.3% C = 4% + 2.60% + (0.02*(5-1)%) + (
C = 6.84% C = 7.52%

2nd year 10th year

C = 4% + 2% + (0.02*(2-1)%) + (0.84%-0.3%) + 0.3% C = 4% + 3.20% + (0.02*(10-1)%) +
C = 6.86% C = 8.22%

3rd year 20th year

C = 4% + 2.33% + (0.02*(3-1)%) + (0.84%-0.3%) + 0.3% C = 4% + 3.60% + (0.02*(20-1)%) +
C = 7.21% C = 8.82%

4th year 30th year

C = 4% + 2.50% + (0.02*(4-1)%) + (0.84%-0.3%) + 0.3% C = 4% + 3.73% + (0.02*(30-1)%) +
C = 7.40% C = 9.15%
 Yield Curve of Treasury and Corporate Bonds
T-Bond Yield C-Bond Yield
10.00%
9.00%
8.00%
7.00%
Annual Yield

6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
0 5 10 15 20 25 30 35

idity premium Maturity in Years

0% + (0.02*(5-1)%) + (0.84%-0.3%) + 0.3%

0% + (0.02*(10-1)%) + (0.84%-0.3%) + 0.3%

0% + (0.02*(20-1)%) + (0.84%-0.3%) + 0.3%

3% + (0.02*(30-1)%) + (0.84%-0.3%) + 0.3%

-Bond Yield

0 35
The left side of the yield curve is likely to be the most volatile over time. Because, the
left side of the curve depicts the short-term interest which is easily influenced by
many aspects such as inflation rate.
 Maturity in Years Yield
1 5.37%
2 5.47%
3 5.65%
4 5.71%
5 5.64%
10 5.75%
20 6.33%
30 5.94%

1. 1 year rate, 1 year from now

(1 + year one yield rate) (1 + X) = (1 + year two yield rate)2
(1 + .0537) (1 + X) = (1 + .0547)2
(1 + 0.0547)2
(1 + X) =
(1 + 0.0537)
(1 + X) = 1.05570094903673
x = 5.57%

2. 5 year rate, 5 years from now

(1 + year five yield rate)^5 (1 + X)^5 = (1 + year ten yield rate)10 (1 + year twenty yield rate)^20 (1 + X)^10 =
(1 + .0564)^5 (1 + X)^5 = (1 + .0575) 10

(1 + 0.0575)10
(1 + X)^5 =
(1 + 0.0564)^5
(1 + X)^5 = 1.32941874407845
x = 5.86%
3. 10 year rate, 10 years from now
(1 + year ten yield rate)^10 (1 + X)^10 = (1 + year twenty yield rate)20
(1 + .0575)^10 (1 + X)^10 = (1 + .0633)20
(1 + 0.0633)20
(1 + X)^10 =
(1 + 0.0575)^10
(1 + X)^10 = 1.95124820732423
x = 6.91%

4. 10 year rate, 20 years from now

(1 + year twenty yield rate)^20 (1 + X)^10 = (1 + year thirty yield rate)30
(1 + .0633)^20 (1 + X)^10 = (1 + .0594)30
(1 + 0.0594)30
(1 + X)^10 =
(1 + 0.0633)20
(1 + X)^10 = 1.65456098925523
x = 5.16%