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Chapter 6: Q. 2 (page 190)

Go to the St. Louis Federal Reserve FRED database, and find daily yield data on the following U.S. treasuries securities: one-month (DGS1MO), three-month (DGS3MO), six-month (DGS6MO), one-year (DGS1), two-year (DGS2), three-year (DGS3), five-year (DGS5), seven-year (DGS7), 10-year (DGS10), 20-year (DGS20), and 30-year (DGS30). Download the last full year of data available into a spreadsheet.

a. Construct a yield curve by creating a line graph for the most recent day of data available, and for the same day (or as close to the same day as possible) one year prior, across all the maturities. How do the yield curves compare? What does the changing slope say about potential changes in economic conditions?

b. Determine the date of the most recent Federal Open Market Committee policy statement. Construct yield curves for both the day before the policy statement was released and the day on which the policy statement was released. Was there any significant change in the yield curve as a result of the policy statement? How might this be explained?

Short Answer

Expert verified

The yield curve became a straight line parallel to the horizontal axis after the policy announcement. Following the implementation, the inflation rate has risen to 21%

Step by step solution

01

Definition

The fixed amount of income investment that is handed to the entity for a particular period of time is referred as bond.

02

Explanation (part a)

Yield curve can be expressed as :

According to the yield curve, there is a fall in the interest rate from the previous year 2017to the current year 2018. According to the yield curve, unemployment is prevailing in the economy and the economic growth is 2.5%, which is the same as 2017.

03

Explanation (part b)

Yield curve before the policy statement:

According to the recent data still March 2018, the yield curve is downward sloping from left to right.

Yield curve after the policy statement:

After the policy statement, the yield curve has become a straight line parallel to the horizontal axis. After the statement, the inflation rate is reached to2.1%

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Most popular questions from this chapter

Predict what would happen to the risk premiums of municipal bonds if the federal government guarantees today that it will pay creditors if municipal governments default on their payments. Do you think that it will then make sense for municipal bonds to be exempt from income taxes?

If the yield curve suddenly became steeper, how would you revise your predictions of interest rates in the future?

Go to the St. Louis Federal Reserve FRED database, and find data on Moody’s Aaa corporate bond yield (AAA) and Moody’s Baa corporate bond yield (BAA). Download the data into a spreadsheet.

a. Calculate the spread (difference) between the Baa and Aaa corporate bond yields for the most recent month of data available. What does this difference represent?

b. Calculate the spread again, for the same month but one year prior, and compare the result to your answer to part (a). What do your answers say about how the risk premium has changed over the past year?

c. Identify the month of highest and lowest spreads since the beginning of the year 2000. How do these spreads compare to the most current spread data available? Interpret the results.

During 2008, the difference in yield (the yield spread) between three-month AA-rated financial commercial paper and three-month AA-rated nonfinancial commercial paper steadily increased from its usual level of close to zero, spiking to over a full percentage point at its peak in October 2008. What explains this sudden increase?

Do you think that a U.S. Treasury bill will have a risk premium that is higher than, lower than, or the same as that of a similar security (in terms of maturity and liquidity) issued by the government of Colombia?
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