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Consider the following information about the yields on government (Trea- sury) bonds and AAA rated securities for the past year: Yields on Treasury bonds 3

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Consider the following information about the yields on government (Trea- sury) bonds and AAA rated securities for the past year: Yields on Treasury bonds 3 Mo 6 Mo 9 Mo 12 Mo 18 Mo 24 Mo 1.54 1.56 1.57 1.58 1.55 1.61 Yields on AAA rated bonds 3 Mo 6 Mo 9 Mo 12 Mo 18 Mo 24 Mo 2.59 2.60 2.79 2.70 2.73 2.90 a) Calculate the premium on AAA rated corporate bonds relative to Treasury yields. What could explain the difference between the yields on these two securities? [5 points] b) Draw the yield curve for the interest rates on both securities. Of the three theories discussed in the lectures, which theory provides a better explanation for the shape of the curves you have drawn? (10 points] Using the expectations theory of the yield curve, fill out the table below: (10 points) 0-3 Mo 1.5 Yields on Treasury bonds 3-6 Mo 6-9 Mo 9-12 Mo 12-15 Mo 1.6 1.7 1.8 1.9 Yields on AAA rated bonds 6 Mo 9 Mo 12 Mo 18 Mo 15-18 Mo 2.0 3 Mo 24 Mo Consider the following information about the yields on government (Trea- sury) bonds and AAA rated securities for the past year: Yields on Treasury bonds 3 Mo 6 Mo 9 Mo 12 Mo 18 Mo 24 Mo 1.54 1.56 1.57 1.58 1.55 1.61 Yields on AAA rated bonds 3 Mo 6 Mo 9 Mo 12 Mo 18 Mo 24 Mo 2.59 2.60 2.79 2.70 2.73 2.90 a) Calculate the premium on AAA rated corporate bonds relative to Treasury yields. What could explain the difference between the yields on these two securities? [5 points] b) Draw the yield curve for the interest rates on both securities. Of the three theories discussed in the lectures, which theory provides a better explanation for the shape of the curves you have drawn? (10 points] Using the expectations theory of the yield curve, fill out the table below: (10 points) 0-3 Mo 1.5 Yields on Treasury bonds 3-6 Mo 6-9 Mo 9-12 Mo 12-15 Mo 1.6 1.7 1.8 1.9 Yields on AAA rated bonds 6 Mo 9 Mo 12 Mo 18 Mo 15-18 Mo 2.0 3 Mo 24 Mo

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