Question

# The data is in the file YieldCurve.xlsx

If you look in the tab "DataFromFred" you can see the data as

downloaded from the "Fred" website. This is a great source of economic and financial data for the US. https://fred.stlouisfed.org/ Take a look at it and you will see how useful it can be as it explains what each variable is. For this assignment the data is arranged for you in the next EXCEL tab.

Find the tab "DataAnalysis1". In the file in the leftmost column you will see the Observation_date. This is Year-Month_Date for the observations. All observations are quarterly so note the months here are January, April, July, and October. Columns B-C are the Year and Quarter of the observation.

The remainder of the data is described as follows

Column D - is the quarter to quarter annualized growth in US Real Gross Domestic Product.

Column E - YR-2_YR-Infl is the year to year inflation measure based on the prior year. So the value for 1982, Quarter 1 is the inflation over the period January 1981 to January 1982. If you look in the "DataFromFred" sheet you will see the formula that calculates this based on the CPI, the formula is not in the DataAnalysis1 tab for simplicity.

Columns F - K are the various Treasury rates for 3 Month, 1 Year, 2 Year, 5 Year, 7 Year, and 10 Year.

**Questions 1., 2., and 3. are worth 10% each of this assignment grade. Question 4 is worth 30% and question 5 is worth 40%. **

1. You are asked by your supervisor to explain the "slope of the yield curve" idea.

a. Provide an intuitive level explanation of what a yield curve is, and what it's slope means. Be sure to be explicit about what is known about the predictive power of the slope of the yield curve.

b. Using the data in "DataAnalysis1" of YieldCurve.xlsx construct a measure of the slope of the yield curve. Explain fully how you calculate the slope of the yield curve. Your measure must be a single number for each year and quarter.

c. Produce a graph of the slope of the yield curve over the January 1892 to April 2019 period. Your graph should show the slope of the yield curve you created in part b. for each available quarter. Be sure to label the graph appropriately.

2. Use the data in the tab "DataAnalysis1" to answer the following questions.

a. Using the data in the file, what is the average of Treasury1Year and YR-2-YRInfl for 1982, 1983, and 2016, 2017, and 2018.

b. What comment can you make based on these averages about the inflation rate and the level of interest rates? Fully explain what your comment.

3. Based upon your work above in number 2.

a. Explain what you would expect to see regarding the correlation between the inflation rate and the 1 year Treasury bill rate.

b. Calculate the correlation using the data in the file, report your value and if that value matched your expectation.

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