24Lecture24

0 fund oating and swap to xed with a payer swap cash

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Unformatted text preview: er swap. CASH FLOW 0.5 0.0 -0.5 -1.0 0 1 2 3 4 N-1 N N-1 N CASH FLOW NUMBER 0.15 Principal Fixed Coupon Funding 1.0 CASH FLOW 0.5 CASH FLOW Fixed Coupon Floating Coupon 0.10 0.0 -0.5 0.05 0.00 -0.05 -0.10 -1.0 -0.15 0 1 2 3 4 N-1 N CASH FLOW NUMBER Swaps: R. J. Hawkins 0 1 2 3 4 CASH FLOW NUMBER Econ 136: Financial Economics 18/ 19 Yield Curves Over Time US Treasury Rates YC Shape Changes Parallel: 80%. 16 12/10/80 Steepen or flatten: 10% . 14 Interest Rate (%) 12 08/26/82 Other: 10%. 10 01/24/95 8 6 YC Dynamic Range Over 1500 bps on short end. 08/13/07 4 03/26/10 2 12/31/08 0 0 2 4 6 Tenor (years) 8 Fixed Income IV: R. J. Hawkins 10 12 Econ 136: Financial Economics Over 1000 bps on long end. 8/ 11 Macroeconomics and the Yield Curve The Federal Reserve controls the short end of the yield curve. The short rate, inflation and GDP come together in the Taylor Rule rt = r + 3 (πt − π ) + 2 1 2 Yt − Y /Y The unemployment rate and GDP come together in Okun’s Law Yt − Y /Y = −c Ut − U where Ut ≡ the unemployment rate. U ≡ the natural rate of unemployment (NAIRU). The monthly non-farm payroll numb...
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