Assignment Requirements:
Please consult the appendix to this document for an example of how to analyze the bond data within the context of your course. The core elements of this assignment contain eight (8) parts, each carrying an equal weight. Please read carefully the following.
Part 1: You are required to collect the most recent bond market data, namely, yields to maturity, over the periods for which you have the data. Your data must be from reliable sources, e.g., you should not collect the data from personal blogs. Also, it should not be from too generic sources, i.e., you should not collect data from Wikipedia.
You are required to choose the US and ANOTHER country of your own choosing.
Part 1A: Collect the yields to maturity and other relevant data, if any, for the maturities of 1, 2, 5, 10, 20, and 30 years. Present your data clearly and neatly in a properly formatted table.
Part 1B: Consult the appendix to this assignment to gain a basic understanding of the approximate method for predicting future interest rates. Use the approximate method to calculate the discount rate ("DR") that the bond market appears to consider appropriate over the following periods (see the Appendix):
- For 1-year
- Averaged over 1 - 2 years
- Averaged over 3 - 5 years
- Averaged over 6 - 10 years
- Averaged over 11 - 20 years
- Averaged over 21 - 30 years
Show all of your detailed workings for at least one country, i.e., either for the USA or for the country of your own choosing, or both. Present your calculations clearly and neatly.
Part 2: Use the reliable internet sources to collect the predicted rates of inflation for all the periods for which you have forecasted the discount rates. Use your calculated discount rates and these inflation rates to predict the real rates of interests for those periods based on the following formula:
Real Rate of Interest = (1 + NoNinal Rate)/(1 + Inflation Rate) - 1
For future periods in which there are no predicted inflation rates, you can assume either that the last predicted inflation rate will stay constant for such periods or that the last real rate of interest as calculated will stay constant. BUT you are required to JUSTIFY your assumptions.
Show all your detailed workings, for at least one country, in this part of your assignment. You can present these workings in an appendix if necessary.
Part 3: Use your results to compare the predicted rates between the USA and your selected country. Make sure that you use your own economic analysis of your results or findings. For example, stating that one rate is higher than the other without any further comment on the reasons for it does not constitute economic analysis. In addition, if you use any other expert opinions from such sources as financial newspapers or statements by some central bank, make sure to quote the source properly.
Part 4: Use your forecasting results in previous parts to make comments on the USA and the rates on TIPS (Treasury Inflation-Protected Securities).
Part 5: Comment on how the YTMs of Treasury bonds have changed since April 30th 2019 as below. How does the market appear to have changed its predictions?
|
Year-bond
|
US
|
US TIPS
|
Australia
|
Japan
|
Germany
|
UK
|
|
Cash
|
2.25%
|
-
|
1.50%
|
0.10%
|
0.00%
|
0.75%
|
|
3-month
|
2.31%
|
-
|
-
|
-
|
-
|
-
|
|
6-month
|
2.28%
|
-
|
-
|
-
|
-
|
-
|
|
12-month
|
2.10%
|
-
|
1.20%
|
-0.15%
|
-0.58%
|
0.62%
|
|
2-year
|
1.84%
|
-
|
1.11%
|
-0.19%
|
-0.67%
|
0.56%
|
|
5-year
|
1.85%
|
0.28%
|
1.17%
|
-0.21%
|
-0.57%
|
0.61%
|
|
10-year
|
2.08%
|
0.35%
|
1.48%
|
-0.10%
|
-0.20%
|
0.86%
|
|
20-year
|
2.61%
|
0.42%
|
1.95%
|
0.29%
|
0.21%
|
1.33%
|
|
30-year
|
2.55%
|
0.73%
|
3.15%
|
0.45%
|
0.41%
|
1.45%
|
Part 6: Use the relevant theories of the term structure of interest rates to discuss how they affect your interpretation/results/findings.
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 (i.e., allowing for inflation) are also low. As measured by inflation-linked bonds, they are around minus 1 % in big rich economies."
Part 8: Discuss how you see the implications of your findings for the stock market.
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