Assignment: Interest Rates and Bond Valuation

Purpose:

To assess your ability to determine bond values and why they fluctuate

Describe the impact of inflation on interest rates

Name ____________________________________________ Interest Rates and Bond Valuation Worksheet Part I: Go to the Federal Reserve's Web site to examine historical monthly interest rates on 10-year government bonds at http://www.federalreserve.gov/releases/h15/data/Monthly/H15_TCMNOM_Y10.txt (Historical data on other selected interest rates can be accessed via http://www.federalreserve.gov/releases/h15/data.htm) and answer the following questions: A. What was the nominal rate on 10-year U.S. Treasury bonds at each of the following dates: 1. At 04/1954: ________ 2. At 09/1976: ________ 3. At 09/1981: ________ 4. For the Latest Month: ________ B. Assume that a $1000 U.S. Treasury bond was purchased at par on each of first three dates above. Also assume that for each of the three bonds the reported nominal rate that you found above was the coupon rate at issuance. Assuming semi-annual coupon payments, calculate the value of each bond after 5 years based on the then 5-year nominal rates on U.S. Treasuries available at http://www.federalreserve.gov/releases/h15/data/Monthly/H15_TCMNOM_Y5.txt to determine the gain or loss on each of the three bonds after 5 years? 1. At 04/1959: ________ 2. At 09/1981: ________ 3. At 09/1986: ________ Which bond would you have preferred to purchase? 04/1954? ________ 09/1976? ________ 09/1981? ________ Why? Part II: According to the textbook's discussion, the Fisher Equation can be expressed as Nominal Interest Rate Real Rate + Expected Inflation. The textbook further explains that the nominal interest rate on any financial instrument is a function of not only the real rate and expected future inflation, but also interest rate risk, default risk, taxability, and the lack of liquidity. Using again the Federal Reserve's historical data on interest rates at http://www.federalreserve.gov/releases/h15/data.htm, find the following rates recorded for the latest month? Federal Funds 4-Week Treasury bills 6-Month Treasury bills 10-Year Treasury bonds 20-Year Treasury bonds 30-Year Treasury bonds Moody's seasoned1 Corporate Bonds Aaa Baa _______ ________ ________ ________ ________ ________ ________ ________ Provide in the space below an explanation for the determination of the latest monthly rate on Moody's seasoned corporate bonds rated Baa based on the above rates and the factors that determine nominal interest rates. 1 \"Moody's Bond Yields Series are based on seasoned bonds with remaining maturities of at least 20 years...from pricing data on a regularly-replenished population of nearly 90 seasoned corporate bonds in the US market, each with current outstandings over $100 million. The bonds have maturities as close as possible to 30 years,...they are dropped from the list if their remaining life falls below 20 years or if their ratings change.\" Source: http://www.globalfinancialdata.com/index.php3?action=detailedinfo&id=3319#metadata