Question 6

(i) Write down an equation for the three main components of the nominal long-term interest rate on a bond, clearly explaining what each symbol represents. (3marks)

(ii) US inflation is picking up discuss the likely implications for US long term bond yields. (2 marks)

(iii) Draw a negatively sloped yield curve and label it curves 1. On the same diagram draw a new yield curve labelled curve 2 if the expected rate of inflation, both short and long term, rises. Label your axes carefully. (5 marks)