7. This exercise relates to the file TermStruc.XLS. You are asked to do the following:

a. Produce at least three graphs of six term structures each for 10 typical subperiods. For example, the term structures from January to June 1953, July to December 1980, and so on.

b. For January 1980, what would have been the coupon rate on a five-year bond with annual coupons? A 10-year bond? To answer this question you have to solve the following equation:

where c is the coupon rate on the bond and rt is the pure discount rate for period t. Note that for a 10-

year bond you will have to interpolate the data.

c. Calculate the coupon rate on five-year bonds for all the data. Graph the results.

d. Now for duration: Return to exercise 7b. Suppose that you have calculated cJan.80, and that immediately following this calculation, the term structure changes to that of February 1980. What will be the effect on the price of the bond? How well is this change approximated by the Macauley duration measure (assuming that the change in the interest rate Δr is the change in the short-term rate)?

e. Repeat the calculation of exercise 7c for at least 10 periods. Report on the results in an attractive and understandable way.