Question

The following table shows the prices of a sample of Treasury strips. Each strip makes a single payment at maturity.

Years to Maturity	Price, (% of face value)
1	98.252	%
2	94.751
3	90.944
4	86.880

a. What is the 1-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

b. What is the 2-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

c. What is the 3-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

d. What is the 4-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

e. Is the yield curve upward-sloping, downward-sloping, or flat?

f. Is this the usual shape of the yield curve? Yes or no?

Answer 1

(e)

As n increases, the yield of the treasury strip increases.

Thus, the yield curve will be upward sloping.

(f) a usual yield curve is upward sloping because it is seen that short term investments have lower yield and long term investments have higher yield.

This is the case in the above problem too. So, yes, this is the usual shape of the yield curve.