Kindly ask you to assist, again!:)
Q4 on Pilot Paper relevant up to Dec 12
We are given the nominal 30 year yield curve (graph) and yield spreads (table).
How can we extract the risk free interest? I saw in the answer sheet there are different interest free rates depending on the maturity.
I think that based on graph if the cross point (3,7% yield, 2 years) is on the yield curve that means that the 2 years free risk rate is 3.7- 35 -basis points (base on the 2 years spread from the table)= 3.35%. But we need the free interest rate for 3 and 10 years? Can we extrapolate something to find it out?
Your first sentence of your second paragraph is correct
However to get 3 and 10 years, it is not possible to extrapolate – you have to read it from the graph as best you can (and for this reason the answer is only approximate, although the graph has been drawn pretty accurately).
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