are171-homework-1-key

are171-homework-1-key - HOMEWORK 1 KEY 1. A Treasury yield...

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HOMEWORK 1 KEY ARE 171a Fall 2010 1. A Treasury yield data: Years to Maturity Date 0.08333333 0.25 0.5 1 2 3 5 7 10 20 30 10/01/10 0.15 0.16 0.19 0.26 0.42 0.63 1.26 1.9 2.54 3.4 3.71 10/01/08 0.66 0.85 1.49 1.72 1.82 2.12 2.87 3.29 3.77 4.33 4.22 10/01/07 3.52 3.92 4.15 4.11 4.02 4.05 4.24 4.37 4.56 4.85 4.79 10/02/00 6.27 6.33 6.06 5.98 5.92 5.86 5.95 5.83 6.18 5.93 10/01/90 7.37 7.53 7.63 7.94 8.12 8.38 8.63 8.71 8.84 1B. 10/01/10 The recent yield curve is upward-sloping, thus "Normal" It is relatively steep , the difference between the 10 yr and 3 month bill is 2.35 0 1 2 3 4 5 6 7 8 9 10 0 5 10 15 20 25 30 35 % yield Years to maturity Treasury yield curves
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The steepness suggests that inflation is expected to rise over time, compared to the very low current rate. (Actual annual inflation as of this past August was about 1.1%) However, the overall level of rates is very low compared to other years. So even though inflation is expected to rise over time, it isn't expected to get too high. Even the 30 year bond yields well below 4%…unusually low. 10/01/08 The yield curve 2 years ago was also upward-sloping, thus "Normal" It is quite steep; the difference between the 10 yr and 3 month bill is 2.92 Investors appeared to expect inflation to rise over time (not correct, yet!) The level of rates is quite low , but not as low as we see today. 10/01/07 This yield curve is also normal but a lot flatter than the ones above. (less steep) Investors didn't expect inflation to rise much, if at all; the spread between 10 yr and 3 month yield is 0.64 The overall level of rates was in the middle compared to the other years we considered. The relative flatness suggested a hint of future weakness (housing prices were starting to drop) 10/02/00 This curve was inverted , suggesting investors expected inflation and future interest rates to decline (which they later did, as you can see). The yield spread between the 10 yr and 3 mo bond was
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are171-homework-1-key - HOMEWORK 1 KEY 1. A Treasury yield...

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