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PART 1 Now over to you to interrogate the yields to maturity (redemption yields) (over the periods for which you have data). You should choose the...

PART 1

Now over to you to interrogate the yields to maturity (redemption yields) (over the periods for which you have data).  You should choose the USA and ONE other country.You may wish to avail of the website:

http://www.bloomberg.com/markets/rates-bonds/government-bonds/**

in the above address, insert ** = us, uk, germany, australia, or japan ]


PART 1A: If you have yields to maturity for years 1, 2, 5, 10, 20, and 30 year bonds, for example, report the yield to maturity over these periods.

PART 1B: Now, using the APPROXIMATE method described in the tutorial above, calculate the discount rate, DR, that the market appears to consider appropriate over (i) for 1 year, (ii) averaged over 1 - 2 years, (iii) averaged over 3-5 years, (iv) averaged over 6 - 10 years, (v) averaged 11-20 years, and (vi) averaged over 21-30 years.


PART 2

Avail of the internet (for example:

http://www.inflation.edu/, or

http://www.tradingeconomics/**/inflation-cpi

where /**/ above = /united-states/, etc.

IMF website: http://www.imf.org/external/pubs/ft/weo/2017/01/

weodata/index.aspx


to obtain the predicted rates of inflation over the periods for which you have predicted the discount rate, DR, that the market considers appropriate (in PART 1B). Use this rate together with the inflation rate to predict the real rates of interest over these periods. Use:

     

PART 3

Compare your answers for the USA with the country of your choice.


PART 4

Comment on your results for the USA and the rates that relate to TIPs (Treasury inflation protected bonds).


PART 5

Comment on how the yields to maturity of Treasury bonds have changed since 3rd April 2017 as below. How does the market appear to have changed its predictions?

 

Year-bonds

US

US TIPS

Treasury inflation protected securities

Australia

Japan

Germany

UK

Cash

0.81

      -

1.5%

0.10%

0%

0.25%

3-months

0.75%

      -

      -

      -

      -

      -

6-months

0.9%

      -

      -

      -

      -

      -

12-months

1.02%

      -

      -

      -

      -

      -

2-year

1.25%

      -

1.74%

- 0.20%

- 0.75%

0.11%

5-year

1.92%

- 0.16%

2.23%

- 0.13%

- 0.39%

0.55%

10-year

2.39%

0.40%

2.69%

0.06%

0.32%

1.14%

15-year

      -

     -

3.06%

      -

      -

      -

20-year

      -

0.54%

      -

0.62%

      -

      -

30-year

3.01%

0.91%

      -

0.84%

1.1%

1.72%



PART 6

How does the "liquidity hypothesis" impact your interpretation? (namely, the idea that long term bonds are more sensitive to changes in interest rates going forward, and hence more risky, for which they require a "liquidity premium" - as much as an addition 1.5% on the YTM compared with a short-term Treasury bill, all else equal).



PART 7

In the light of your findings, comment on the excerpt below from The Economist:


Buttonwood 4-10 March 2017.

  If there is one aspect of the current era sure to obsess the financial historians of    tomorrow, it is the unprecedented low level of interest rates. Never before have           deposit rates or bond yields been so depressed in nominal terms, with some         governments even able to borrow at negative rates. It is taking a long time for  investors to adjust their assumptions accordingly.

           Real interest rates (ie, allowing for inflation) are also low. As measured by inflation-        linked bonds, they are around minus 1 % in big rich economies.


PART 8

Comment on how you see the implications of your findings for the stock market. 

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