The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. X Download spreadsheet Interest Rate Determination and Yield Curves-ad3a26.xlsx a. What effect would each of the following events likely have on the level of nominal interest rates? 1. Households dramatically decrease their savings rate. This action will increase the supply of money; therefore, interest rates will decline 2. Corporations increase their demand for funds following an increase in investment opportunities. This action will cause interest rates to increase 3. The government runs a smaller-than-expected budget deficit. The smaller the federal deficit, other things held constant, the higher the level of interest rates. 4. There is an increase in expected inflation. This expectation will cause interest rates to decrease b. Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free rate is 5%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.03 (t- 1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.2%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. U.S. Treasury AAA corporate AA corporate A corporate Rate 0.83% 1.03 1.43 1.85 Corporate Bond Yield Spread = DRP + LP What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: 7-year Corporate yield: % 0.20% 0.60 1.02 % c. Given the following Treasury bond yield information, construct a graph of the yield curve. Yield 5.32% 5.42 5.62 5.69 5.60 5.71 6.27 5.86 Maturity 1 year 2 years 3 years 4 years 5 years 10 years 20 years 30 years Choose the correct graph. The correct graph is A. C. Interest Rate 8% 7%- 6% 5% 4% 3% 2% 1% 0% + 8%- 7%- 6% 5% 4% 3% 2% 1% no/ 10 Yield Curve 15 Years to Maturity 20 Yield Curve 25 30 B. D. Interest Rate 8% 7% 6% 5% 3% 2% 1% 0% + 8% 7% 6% 5%- 4% #3%- 2% 1%- no/ 10 Yield Curve 15 Years to Maturity Yield Curve 20 25 30 d. Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places. Years 1 C G AWN 10 20 30 Treasury yield 5.32% 5.42% 5.62% 5.69% 5.60% 5.71% 6.27% 5.86% AA-corporate yield % % % % % % % % The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. X Download spreadsheet Interest Rate Determination and Yield Curves-ad3a26.xlsx a. What effect would each of the following events likely have on the level of nominal interest rates? 1. Households dramatically decrease their savings rate. This action will increase the supply of money; therefore, interest rates will decline 2. Corporations increase their demand for funds following an increase in investment opportunities. This action will cause interest rates to increase 3. The government runs a smaller-than-expected budget deficit. The smaller the federal deficit, other things held constant, the higher the level of interest rates. 4. There is an increase in expected inflation. This expectation will cause interest rates to decrease b. Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free rate is 5%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.03 (t- 1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.2%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. U.S. Treasury AAA corporate AA corporate A corporate Rate 0.83% 1.03 1.43 1.85 Corporate Bond Yield Spread = DRP + LP What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: 7-year Corporate yield: % 0.20% 0.60 1.02 % c. Given the following Treasury bond yield information, construct a graph of the yield curve. Yield 5.32% 5.42 5.62 5.69 5.60 5.71 6.27 5.86 Maturity 1 year 2 years 3 years 4 years 5 years 10 years 20 years 30 years Choose the correct graph. The correct graph is A. C. Interest Rate 8% 7%- 6% 5% 4% 3% 2% 1% 0% + 8%- 7%- 6% 5% 4% 3% 2% 1% no/ 10 Yield Curve 15 Years to Maturity 20 Yield Curve 25 30 B. D. Interest Rate 8% 7% 6% 5% 3% 2% 1% 0% + 8% 7% 6% 5%- 4% #3%- 2% 1%- no/ 10 Yield Curve 15 Years to Maturity Yield Curve 20 25 30 d. Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places. Years 1 C G AWN 10 20 30 Treasury yield 5.32% 5.42% 5.62% 5.69% 5.60% 5.71% 6.27% 5.86% AA-corporate yield % % % % % % % %