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1. (32) Data on nominal yields of US Treasury secu...

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1. (32) Data on nominal yields of US Treasury securities can be found at: http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.html (a) (10 pts) In this problem you will diagram and discuss how the Treasury yield curve changes over time. For each date below, find the nominal rates that were in effect at that time. (To view older dates, go to the page above, then click "historical data"). You can either copy the values down by hand, or copy and paste using the computer. 10/01/2010 (our recent market conditions)...data shown below Date 1 mo 3mo 6mo 1 yr 2 yr 3 yr 5 yr 7 yr 10yr 20yr 30yr 10/01/10 0.15 0.16 0.19 0.26 0.42 0.63 1.26 1.90 2.54 3.40 3.71 10/01/2008 (2 years ago) 10/01/2007 (3 years ago) 10/02/2000 (10 years ago) 10/01/1990 (20 years ago) After showing your data above, plot the yield curve for each of these 5 time periods, showing % yield on the Y axis, and time to maturity on the X axis. You will have 5 yield curves, all on one common graph. Make the plot a full page in size, so you have room to see differences in the curves clearly. (Note that to keep the curve proportional using a graphing program, you need to use an "X-Y" graph format, where X is years, then enter .25 for 3 months, .5 for six months, etc.) (b.) (12) Look at the five yield curves above. For each year: answer Was the yield curve normal, or inverted? How ?steep? or flat was it, as measured by the difference in yield between a 10 yr and a 3 month maturity? Calculate this difference for each year's curve. (We are comparing 3 months and 10 years because some of the other maturities are missing for some years) Was the average level of interest rates relatively high, or low as compared with the other years? (okay to use visual inspection, don't need to calculate) What economic factors could explain these differences in the yield curve over time? (Discuss briefly what economic conditions might have caused the level and the slope to change over time as they did). 1. a, continued (c) (2) Suppose you had purchased a 30 year Treasury bond in 1990 and still held it today. In retrospect, do you think you would be happy that you had made this investment? Explain. Now, what if you decided to purchase a new 30 year Treasury bond today (at the10/1/2010 rate of return.) Do you think you will be happy to hold this over the next 20 to 30 years? The answer is your opinion, but briefly explain why you chose your answer (d) (3 pts) Now from the link above, click on ?Daily Treasury Real Yield Curve Rates?. These reflect the yield on Treasury Inflation-Protected Securities (?TIPS?), not including the adjustment for inflation based on the Consumer Price Index, which investors received when their bonds mature. .On 10/01/2010, what real rates of return could investors lock in for 5 or 20 years? How much less are these rates than the 10/01/2010 nominal yields for the same maturities that you used in part a, and what does this imply about investors' expectations of future inflation? (e) (3 points) Looking again at the online data for ?Daily Treasury Real Yield Curve Rates?, do you see anything odd about recent rates on 5 year bonds, and when did these odd results begin? What could be a possible explanation for this market phenomenon? (f)(2) Go to bonds.yahoo.com/rates.html. Compare today's yields on the 5 year treasury, the 5 year AAA corporate bond, and the 5 year A rated bond. What would explain these differences in rates? (Numbers will vary slightly depending on which day you look.) 2. (10) Find the real rate of return on these investments: a. A 5-year certificate of deposit that yields a nominal return of 2.8%, if the price of consumer goods increases by 2.5% per year; b. A Japanese savings account that has a nominal yield of 0.5%, if the price of a market basket of consumer items declines from 10000 yen to 9900 yen during the year. (Note: this is an example of deflation, as opposed to inflation). c. A checking-with-interest bank account yielding 0.3% (careful, that?s less than 1%, not 30%!), if inflation is 3.0%. d. A rental home that increases 10% in nominal value in a year, if inflation is 4%. e. A bank account that yields a nominal annual return of 2.6%, if a market basket of consumer items rises in price from $800 to $840. 3. (8) Let?s compare the accounting profits (earnings after taxes) and cash flows of two hypothetical farms. Farm A sold $700,000 of crops, paid $400,000 in growing expenses, and had depreciation of $200,000. Farm B sold $350,000 in crops, paid $190,000 in growing expenses, and had depreciation of $40,000. Assume each farm is operated as a sole proprietorship, each farmer is married (filing jointly), and use 2009 IRS tax rates. For each farm, find (i) earnings after taxes and (ii) cash flow. As an investor, which farm would you likely prefer to own? (based on this rather limited information, of course!)

 

Paper#11806 | Written in 18-Jul-2015

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