Inflation affects purchasing power of money and therefore has a major effect on interest rates. Therefore if inflation rate is expected to be 1% during the next year this is added to the risk free interest rate (say 3.5%) and so the Treasury bill rate will be: rT-bill = rRF = r* + IP = 3.5% + 1% = 4.5% The inflation rate is the main factor which determines the shape of the treasury yield curve. If the inflation rate is expected to increase, then the treasury yield curve will slope upwards; which is normal. On the other hand, if the inflation rate is expected to decrease, then this will cause the treasury yield curve to slope downwards. Another factor affecting the Treasury bill rate is interest rate risk. When interest rates rises the prices of treasury bonds decline sharply and since this is a regular occurrence all long term bonds including treasury bonds have an element of interest rate risk. A maturity risk premium (say 2.5%) is therefore added to the risk free rate resulting in the following formula for calculating the Treasury bill rate. rT-bill = rRF = r* + IP + MRP. = 3.5% + 1% + 2.5 = 7% This premium increases with the time to maturity. Therefore, the longer the period the higher maturity risk premium. ...

Download paper
### Related Essays

Costco Wholesale Corporation: Financial Analysis
Costco Wholesale Corporation is the fifth largest retailer and the largest membership warehouse in the United States (2011 Top 250 Global Retailers, 2011), having presence in Japan, Mexico Australia, Korea and the United Kingdom. Founded in 1983, Costco has, as of 2011, gone on to establish 582 warehouses worldwide, 492 of which are located in the United States (Audited Financial Statement 2011, 22). The business model of Costco is centered around memberships which allows customers access to the product catalogue of the company at significant discounts. As such, the company is following the…

Yield Curve
If we compare the price movement of the stock with that of the S&P 500, NASDAQ and Dow Jones Industrial Average, we see a positive correlation between the stock price and the three indices. The stock prices have moved with the market in the past one year. But on the other hand, the stock price movements have been less vigorous than the three indices, which mean that the stock is not as volatile as the market. In absolute terms the sales and profitability of the firm has increased in the past 3 years. The sales have grown at a rate of 2.15% in the past three years. The profitability of the firm…

Saving for the Future Coursework
However, owing to the notion of time value of money, the buyer would be required to save an amount different from that of $25,000. Taking the 5 year interest rate of 0.78% (U.S Department of The Treasury, 2012), the saving required annually amounts to the future value of an annuity (ordinary) assuming that $125,000 will be required after 5 years. This amounts to: 125,000= C* {(1.0078^5)-1/0.0078} = $24,613.03 Where: C= unknown i= 0.78% n=5 This is based on the following formula: FV (annuity) = C * {[(1+i) ^n – 1] / i} (Brigham & Houston, 2011) Where: C = Cash flow per period i = interest…

Term Structure / Yield Curve, Financial Crises and Foreign Exchange Market
As the yield curve with long term maturity level tends to minimise the risk factor hence yield curve is a very important factor behind the estimation of the level of risk in the market related to a security. Thus higher the risk steeper is the yield curve and vice-versa. The yield curve may shift up or down depending on the change in the market. But it is assumed that the change in the maturity period by the same amount as that of the interest rate of the securities causes the yield curve to shift in a parallel manner. The risk factor cannot be interpreted properly as the whole theory is based…

Yield Curve and Bond Valuation
Whereby, if that date was not a business date the preceding date was selected as shown in the table below. Business Date chosen Five Years Ago 1st January 2007 1-month Nominal T-bill Rate on that date 5.02% 3-month Nominal T-bill Rate on that date 4.79% 6-month Nominal T-bill Rate on that date 5.11% 1-year Nominal T-note Rate on that Date 5% 5-year Nominal T-note Rate on that Date 4.68% 10-year Nominal T-note Rate on that Date 4.68% 20-year Nominal T-note Rate on that Date 2.68% 30-year Nominal T-note Rate on that Date 0.81% The yield curve in action: US Treasuries, 1St Februry2007 Yields 6%…

risk management
This report will focus on the different types of yield curves and how changes in the slope of yield curve impacts the future prospects of the economy. Further, it will also take into consideration the effectiveness of monetary policy responses in the time of financial crisis and how those responses have affected the shape of the yield curve. Table of Contents Executive Summary 2 Table of Contents 3 Introduction 4 Task 1: To Examine the Types of Yield Curve 4 Task 2: Impact of Yield Curve on Future Economic Prospect 6 Task 3: Effectiveness of Monetary Policy 9 Task 4: Implication for Investor…

Ploting the current yield curve
The yield curve shows a declining trend of Average Interest Rates for both the marketable and the non-marketable treasury securities in the US security market. It shows a negative gradient on the curve for a period of 13 years for the purpose of making qualitative comparison. For the entire period, the best period of interest for trading is 2013, since the interest rates are on the rise yet the results are for the yields for the first half of the year. It is a declining performance indicator showing that the interest rate is likely to continue falling in the coming years if all factors remain…