While the Federal Reserve controls short-term interest rates, long-term interest rates essentially depend on supply/demand dynamics, as well as longer-term interest rate expectations. In order to examine the relationship between short-term and long-term interest rates, monthly data were collected on the three-month Treasury yield (in %) and the 10-year Treasury yield (in %). A portion of the data is shown in the accompanying table.

a. Estimate and interpret a sample regression equation using the 10-year yield as the response variable and the three-month yield as the predictor variable. 

b. Interpret the coefficient of determination. 

c. At the 5% significance level, is the three-month-yield significant in explaining the 10-year yield? 

d. Many wonder whether a change in the three-month yield implies the same change in the 10-year yield. At the 5% significance level, is this belief supported by the data?

Transcribed Image Text:

Month Jan Feb ⠀ Dec Year 2016 2016 ⠀ 2017 3-month 0.26 0.31 ⠀ 1.32 10-year 2.09 1.78 2.40