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Go to the http://www.federalreserve.gov/releases/h15/data.htm to examine historical daily interest rates on U.S. Treasuries.

Scroll down to "Treasury constant maturities" and in the row "1-month" under "Nominal" click "Business day."

As you can see, rates on the one-month U.S. Treasury bill are provided for each business day from July 31, 2001 to the present. For this assignment you are asked to pick a business date five years ago this month. (For example, in January 2012 I would pick a business date in January 2007.)

Then, using this row and the subsequent rows below it under “Treasury Constant Maturities” determine the shape of the yield curve (See Figure 6.11in the textbook for examples of Treasury yield curves) on that date five years ago based on the rates published by the Fed by completing the table below for the listed Treasury maturities (see example below):

Business Date Chosen Five Years Ago

7/15/2010

1-month Nominal T-bill Rate on that Date

0.16

3-month Nominal T-bill Rate on that Date

0.15

6-month Nominal T-bill Rate on that Date

0.2

1-year Nominal T-note Rate on that Date

0.27

5-year Nominal T-note Rate on that Date

1.76

10-year Nominal T-note Rate on that Date

3

20-year Nominal T-bond Rate on that Date

3.77

30-year Nominal T-bond Rate on that Date

3.97

Answer the following questions:

On your selected date was the yield curve rising, falling, or flat? What explanation(s) would you give for this shape?

From my selected date, the yield curve is rising. This is due to the fact that the longer money is invested the more you’re compensated and earn due to the fact that the interest rates being higher.

Assume that two U.S. Treasury securities were purchased at par ($1000) on your selected date five years ago: 1) a 10-year T-note and 2) a 20-year T-bond. Also assume that for each of the two securities the reported nominal rate that you found above was the coupon rate at issuance.

Assuming semi-annual coupon payments, calculate the value of each bond today after 5 years based on the current 5-year Treasury constant maturity nominal rate for the original 10-year note and a current 15-year rate (assume it is the average of the current Treasury constant maturity nominal 10- and 20-year rates) for the original 20-year bond at http://www.federalreserve.gov/releases/h15/data.htm.

Complete the following tables (see example below):

10-Year Bond Purchased for $1000 5 Years Ago

Original Value

$1000

Coupon Rate (From table you completed above at the chosen date from 5 years ago, the original 10-year Nominal T-bond Rate divided by 2 for semi-annual payments)

Current 5-Year Yield to Maturity (The most recent 5-year Nominal T-note Rate reported at the Fed site divided by 2 for semi-annual payments)

Number of Semi-Annual Periods Remaining

Current Value*

Gain or Loss on the Bond over the 5 years

20-Year Bond Purchased for $1000 5 Years Ago

Original Value

$1000

Coupon Rate (From table you completed above at the chosen date from 5 years ago, the original 20-year Nominal T-bond Rate divided by 2 for semi-annual payments)

Current 15-Year Yield to Maturity (Take the average of the most recent 10- and 20-year Nominal T-bond Rates reported at the Fed site, and then divide this average rate by 2 for semi-annual payments)

Number of Semi-Annual Periods Remaining

30

Current Value*

Gain or Loss on the Bond over the 5 years

*Current Value = PVBond = Coupon Payment +

b) Did you gain or lose more on one bond relative to the other? Explain.

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Nelly Stracke
Nelly StrackeLv2
28 Sep 2019

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Related questions

Using Alaska Airlines:

Here is the formula: RS = RF + Beta (RM-RF). I need to calculate RM and RF to and beta of your stocks to estimate Rs.

How to get RM and RF to and beta?

Go to Yahoo Finance or Google Finance and find Beta for Alaska Airline stocks.

S&P 500 index is a good proxy for return on the market (RM). To find RM, go to Yahoo!Finance to get the monthly close price of S&P 500 Index for the last 30 years (January 1, 1985 to December 31, 2014) , click on this link (http://finance.yahoo.com/q/hp?s=%5EGSPC+Historical+Prices (Links to an external site.) ), which will take you to historical price of S&P 500 index. Then click on historical price, change the start date and end date, select monthly and then click on get price. If you scroll down you will see download to spreadsheet. Once you download the data, just leave date and adjusted close price. Then calculate monthly return using adjusted close price of S&P 500 index and calculate average return using average function in Excel. You can use the average return as RM.

To find RF go to Federal Reserve Website ( http://www.federalreserve.gov/releases/h15/data.htm ) and get Treasury constant maturities 7-year monthly rates for the last 30 years (January 1, 1985 to December 31, 2014). Download the monthly rates and calculate the average rate using average function in excel. You can use the average rates on Treasury as RF.

Now you have RM, RF and Beta. Put them in the following formula to get RS for your companies: RS = RF + Beta (RM-RF).

Please explain step by step.

Nominal Interest Rates and Yield Curves: A recent study of inflationary expectations has revealed that the concensus among economic forecasters yields the following average annual rates of inflation expected over the periods noted. (Note: Assume that the risk that future interetst rate movements will affect the longer maturities more than the shorter maturities is 0; that is, assume that there is no maturity risk)

Period

Avg Annual Rate of Inflation
3 Months 5%
2 Years 6%
5 Years 8%
10 Years 8.5%
20 Years 9%

A) If the real rate of interest is currently 2.5%, find the nominal rate of interest on each of the following U.S. Treasury issues: 20-year bond, 3-month bill, 2-year note, and 5 year bond

B) If the real rate of interest suddenly dropped to 2% without any change in inflationary expectations, what effect, if any, would it have on your answers in part a? Explain

C) Using your findings in part a, draw a yield curve for U.S. Treasury securities.

D) What would a follower of the liquidity preference theory say about the preferences of lenders and borrowers tend to affect the shape of the yield curve drawn in part C? Illustrate that effect by placing on your graph a dotted line that approximates the yield curve without the effect of liquidity preference

E) What would a follower of the market segmentation theory say about the supply and demand for long term loans versus the supply and demand for short term loans given the yield curve constructed for part C of this problem?

Thanks for the help! :)

PROBLEMS, GRAPGHING

1. Suppose a candidate who runs on a platform of “soak the rich” wins the 2016 presidential election. After being elected, he or she persuades Congress to raise the top marginal tax rate on the federal personal income tax to 65%.

a. Use one graph to show the effect of this change in tax rates on the market for municipal bonds and another graph to show the effect on the market for U.S. Treasury bonds.

b. What happened to the interest rate spread between municipal bonds and U.S. Treasury bonds and why?

Suppose that, holding yield constant, investors are indifferent as to whether they hold bonds issued by the federal government or bonds issued by state or local governments (they consider the bonds the same with respect to default risk and liquidity). Suppose that state government issued console with $60 annual payments and that the federal government has also issued console with $60 annual payments.

a. If the federal and state consoles have both the same after-tax yields of 6%, what are their pretax yields? (Assume that the federal income tax rate is 36%)

2. Suppose it is 2020 and 1-year interest rate is 5 percent. You observe that the interest rate on 2-year bond is 4.5%. Assume there is no liquidity premium and the interest rates are determined according to expectation hypothesis of the yield curve

a. Based on the interest rates above, what is the expected 1-year interest rate, starting one year from today?

b. If the interest rate on 3-year bond is 4%., what is the expected 1-year interest rate starting 2 years from today?

c. If the interest rate on 4-year bond is 4%., what is the expected 1-year interest rate starting 3 years from today?

d. Draw the yield curve for the next four years.

e. Is the yield curve for the next four years upward sloping or downward sloping? Explain why

f. What might the yield curve today indicate about future interest rates?

g What might the yield curve today indicate about future economic activity? Explain why?

h. What might the yield curve indicate about the markets’ prediction for inflation rate in the next four years?

i. What might the yield curve indicate about monetary policy today?

j. What might the yield curve indicate about a long-term bonds price? Expected return on long-term bonds? Explain

k. Given the slope of the yield curve today, would you rather be lender or borrower in the next five years? Why?

3. The following is from an article in the Wall Street Journal, describing events in the market for Treasury securities on the given day: “Treasury prices were mixed, with the shorter end of the yield curve falling and the longer- dated Treasury rising in prices”.

a. Draw Treasury yield curve, showing the situation on that day as described in the sentence above.

Explain why prices of Treasury were mixed with the shorter end of the yield curve rising in prices and the longer- dated Treasury falling in prices.

Given the latest data on the state of the U.S. economy, assume that the Fed signals the next increase in the target for the federal funds. The increase won’t happen until the Fed’s meeting in summer of 2016.

Will the Treasury yield curve become more or less steep today?

Which of the following would you expect in the market for Treasury? Explain your choice

- There will be an increase in demand for bond today?

There will be a decrease in supply of bonds today?

There will be a decrease in demand for bonds today?

There will be an increase in supply of bonds today?

What will happen to the yields on Treasury? Explain

4. The table below shows current and expected future one-year interest rates, as well as current interest rates on n-year bonds

Year One-year Bond Rate N-Year Bond Rate Liquidity premium

1 2% 2% _______

2 3% 3% _______

3 4% 5% _______

4 6% 6% _______

5 7% 8% _______

Assume the expectation theory of the term structure and calculate interest rates in the term structure for maturities of one to five years.

Draw the yield curve for the next four years.

Is the yield curve for the next four years upward sloping or downward sloping? Explain why

What might the yield curve today indicate about future interest rates?

What might the yield curve today indicate about future economic activity? Explain why?

What might the yield curve indicate about the markets’ prediction for inflation rate in the next four years?

Calculate the liquidity premium for each n-year bond

What does the liquidity premium stay for?

Compare the liquidity premium in 2-year bond and 5-year bond. Why is the liquidity premium on 2-year bond lower than the liquidity premium on 5-year bond?

5. A Suppose that you are the manager of the Bank One. Assume required reserve ratio 10 percent. The bank has the following balance sheet:

Assets Liabilities

Reserves $ 65 million Deposits $ 400 million

Loans $ 425 million Bank capital $ 90 million

Is Bank One meeting the reserve requirement?

By how much can Bank One increase its loans?

Suppose Bank One suffers a deposit outflow of $40 million .Illustrate numerically the effect of the deposit outflow of $40 million on the bank’s deposits and reserves

Does the bank now hold excess reserves?

Is the bank meeting a required reserve ratio of 10 percent?

What action must you take to meet the reserve requirement? List three or more actions. work

If a borrower defaults on a loan of $10 million, will be the bank able to sustain the loss?

Why no, why yes?

If Bank One ROA is 7%, what is the bank profit? What is the bank ROE?

How can you increase the bank’s ROE, what trade –off do you face?

6. Suppose that you are the manager of the Bank One that has $30 million of fixed assets, $20 million of variable interest rate assets, $15 million of fixed liabilities and $25 million of variable interest rate liabilities.

a. Is the rate sensitivity gap positive or negative? Explain

b. Explain verbally and show numerically what will happen to the bank profits if interest rates rise by 4 percent.

c. What action would you take to reduce the bank’s interest-rate risk? Explain

d. Explain and show numerically what happens to the bank profit if interest rates fall by 4 percent

e. What action would you take to reduce the bank’s interest-rate risk? Explain

f. Given the bank assets and liabilities explain how you can use the interest rate swaps to reduce the bank interest rate risk. Would you trade variable- rate payments for fixed- rate payment? Why yes, why not?

7. Assume the following information about the banking system

Quantities in billions of dollars

Currency (C) = $762

Excess Reserves ( R ) = $66

Required reserves (RR) = $0

Checking deposits (D ) = $604

Give the numerical answer to the following questions:

a. What is the size of the monetary base?

b. What is the money supply in the economy?

c. What is the size of the money multiplier?

Assume that the currency to deposit ratio rises to 1.5

a. Compute the effect of the change in currency ratio on the money multiplier, m

b. What will be the money supply now given the monetary base?

If the Fed wants to keep the money supply at the initial level in part b, how must the Fed respond? Explain

Would the Fed adjust the money multiplier, the monetary base or both to keep the money supply at the initial level?

How much would the Fed buy or sell in the government bonds to keep the money supply at the initial level?

8. Assume that the MB = $828, Money supply = $1366, Currency in the circulation = $ $762, Deposit = $$604, the currency to deposits ratio c is 1.262, the excess reserve ratio is 0.109, the required reserve ratio is 0, and the money multiplier m= 1.650. The non-bank public shifts $40B from currency to deposits, and the Fed wishes to keep the money supply at the level of $1366 B. Explain verbally and show numerically the effect of the currency shift on the following

a. The level of reserves in the banking system

b. The monetary base

c. The size of the money multiplier

d. How should the Fed respond given his goal of keeping the money supply at the level of $1366? Explain

e. How much in the government bonds should the Fed buy or sell to keep the money supply at the level of $1366?

9. Use the graph of the market for reserves to analyze each of the following situations. Be sure that your graph clearly shows changes in the equilibrium federal funds rate, changes in the equilibrium level of reserves, any shifts in the demand and supply curves, and any change in equilibrium federal funds rate

Suppose that the Fed decides to increase the federal funds rate from 2%to 2.25%. Show graphically and explain verbally what policy tools the Fed can use to bring the change in the federal funds rate.

Suppose that the Fed decides to decrease the federal funds rate from 2.25%to 2.%. Show graphically and explain verbally what policy tools the Fed can use to bring the change in the federal funds rate.

Suppose that banks increase their demand for reserve. Show graphically and explain verbally how the Fed can offset this change in order to keep the equilibrium federal funds rate unchanged

Suppose there is a switch from currency into deposits, everything else held constant. Show graphically and explain verbally how the Fed can offset this change in order to keep the equilibrium federal funds rate unchanged

Suppose that the Fed decides to decrease the required reserve ratio. Show graphically and explain verbally how the Fed can offset this change in order to keep the equilibrium federal funds rate unchanged.

f. Suppose that banks decrease their demand for reserves. Show graphically and explain

verbally how the Fed can offset this change in order to keep the equilibrium federal funds

rate unchanged.

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