Question 1: Using the most recent issue of the Wall Street Journal, review the yields for the following securities:
|
Type
|
Maturity
|
Yield
|
|
Treasury
|
10-year
|
-
|
|
Corporate: high quality
|
10-year
|
-
|
|
Corporate: medium quality
|
10-year
|
-
|
|
Municipal (tax-exempt)
|
10-year
|
-
|
A) If credit (default) risk is the only reason for the yield differentials, then what is the default risk premium on the corporate high-quality bonds? And on the medium quality bonds?
Question 2: At the beginning of 2009, the Market Place was concerned with interest rate levels and the possibility of inflation. Given the following information, determine if you agree that the FED had anything to be concerned about.
Current US Treasury Rates at a Glance
"Rates for US Treasury Bonds, Bills and Notes." as of 12/28/08
|
|
COUPON
|
MATURITY
DATE
|
CURRENT
YIELD
|
|
3-Month
|
0.000
|
03/26/2009
|
0.06
|
|
6-Month
|
0.000
|
06/25/2009
|
0.22
|
|
12-Month
|
0.000
|
12/17/2009
|
0.36
|
|
2-Year
|
0.875
|
12/31/2010
|
0.88
|
|
3-Year
|
1.125
|
12/15/2011
|
1.06
|
|
5-Year
|
1.500
|
12/31/2013
|
1.51
|
|
10-Year
|
3.750
|
11/15/2018
|
2.13
|
|
30-Year
|
4.500
|
05/15/2038
|
2.61
|
a. Calculate the annual forward rates for one year and two years from now.
b. Calculate the annual expected inflation rates for each of the current and next two years if the real rate is defined as 2%.
c. Discuss if the FED should have been concerned with inflation.