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Chapter 6: Q. 19 (page 189)
If the yield curve suddenly became steeper, how would you revise your predictions of interest rates in the future?
A decrease in the expected future interest rate implies a decrease in the slope of the yield curve.
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The table below shows current and expected future one-year interest rates, as well as current interest rates on multi-year bonds. Use the table to calculate the liquidity premium for each multiyear bond.
In the fall of , AIG, the largest insurance company in the world at the time, was at risk of defaulting due to the severity of the global financial crisis. As a result, the U.S. government stepped in to support AIG with large capital injections and an ownership stake. How would this affect, if at all, the yield and risk premium on AIG corporate debt?
During 2008, the difference in yield (the yield spread) between three-month AA-rated financial commercial paper and three-month AA-rated nonfinancial commercial paper steadily increased from its usual level of close to zero, spiking to over a full percentage point at its peak in October 2008. What explains this sudden increase?
If a yield curve looks like the one shown in the figure below, what is the market predicting about the movement of future short-term interest rates? What might the yield curve indicate about the market鈥檚 predictions for the inflation rate in the future?
Go to the St. Louis Federal Reserve FRED database, and find data on Moody鈥檚 Aaa corporate bond yield (AAA) and Moody鈥檚 Baa corporate bond yield (BAA). Download the data into a spreadsheet.
a. Calculate the spread (difference) between the Baa and Aaa corporate bond yields for the most recent month of data available. What does this difference represent?
b. Calculate the spread again, for the same month but one year prior, and compare the result to your answer to part (a). What do your answers say about how the risk premium has changed over the past year?
c. Identify the month of highest and lowest spreads since the beginning of the year 2000. How do these spreads compare to the most current spread data available? Interpret the results.
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