1. Go to theFederal Reserve Web siteto examine historical interest rates on U.S. Treasuries.
2. Scroll down to "Treasury constant maturities" and in the row "1-month" under "Nominal" click "Business day."
3. Complete theYield Curve & Bond Valuation Worksheet (attached).

Chose one of the following dates to complete the assignment:

October 15, 2012:Use, October 15, 2017 as the date when looking up the 5-Year YTM (yield to maturity) and the current 15 year YTM data.

October 16, 2012:Use, October 16, 2017 as the date when looking up the 5-Year YTM (yield to maturity) and the current 15 year YTM data.

October 17, 2012:Use, October 17, 2017 as the date when looking up the 5-Year YTM (yield to maturity) and the current 15 year YTM data.

Yield Curve and Bond Valuation Worksheet Action Items: 1. Go to the http://www.federalreserve.gov/releases/h15/data.htm to examine historical daily interest rates on U.S. Treasuries. 2. Scroll down to "Treasury constant maturities" and in the row "1-month" under "Nominal" click "Business day." As you can see, rates on the one-month U.S. Treasury bill are provided for each business day from July 31, 2001 to the present. For this assignment you are asked to pick a business date five years ago this month. (For example, in January 2012 I would pick a business date in January 2007.) Then, using this row and the subsequent rows below it under \"Treasury Constant Maturities\" determine the shape of the yield curve (See Figure 6.11in the textbook for examples of Treasury yield curves) on that date five years ago based on the rates published by the Fed by completing the table below for the listed Treasury maturities (see example below): Business Date Chosen Five Years Ago 1-month Nominal T-bill Rate on that Date 3-month Nominal T-bill Rate on that Date 6-month Nominal T-bill Rate on that Date 1-year Nominal T-note Rate on that Date 5-year Nominal T-note Rate on that Date 10-year Nominal T-note Rate on that Date 20-year Nominal T-bond Rate on that Date 30-year Nominal T-bond Rate on that Date Answer the following questions: 3. On your selected date was the yield curve rising, falling, or flat? What explanation(s) would you give for this shape? 1 4. Assume that two U.S. Treasury securities were purchased at par ($1000) on your selected date five years ago: 1) a 10-year T-note and 2) a 20-year Tbond. Also assume that for each of the two securities 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 today after 5 years based on the current 5-year Treasury constant maturity nominal rate for the original 10-year note and a current 15-year rate (assume it is the average of the current Treasury constant maturity nominal 10- and 20-year rates) for the original 20-year bond at http://www.federalreserve.gov/releases/h15/data.htm. a) Complete the following tables (see example below): 10-Year Bond Purchased for $1000 5 Years Ago Original Value Coupon Rate (From table you completed above at the chosen date from 5 years ago, the original 10year Nominal T-bond Rate divided by 2 for semiannual payments) Current 5-Year Yield to Maturity (The most recent 5-year Nominal T-note Rate reported at the Fed site divided by 2 for semi-annual payments) Number of Semi-Annual Periods Remaining Current Value* Gain or Loss on the Bond over the 5 years 20-Year Bond Purchased for $1000 5 Years Ago Original Value Coupon Rate (From table you completed above at the chosen date from 5 years ago, the original 20year Nominal T-bond Rate divided by 2 for semiannual payments) Current 15-Year Yield to Maturity (Take the average of the most recent 10- and 20-year Nominal T-bond Rates reported at the Fed site, and then divide this average rate by 2 for semi-annual payments) Number of Semi-Annual Periods Remaining Current Value* Gain or Loss on the Bond over the 5 years *Current Value = PVBond = Coupon Payment $1000 10 $1000 30 + b) Did you gain or lose more on one bond relative to the other? Explain. Example: 2 Assume today is June 20, 2011. I go back 5 years to 6/20/2006 and find the following rates (Should the date you choose not be a business day on any of these past dates then pick the rate on the next business day): Business Date Chosen Five Years Ago 1-month Nominal T-bill Rate on that Date 3-month Nominal T-bill Rate on that Date 6-month Nominal T-bill Rate on that Date 1-year Nominal T-note Rate on that Date 5-year Nominal T-note Rate on that Date 10-year Nominal T-note Rate on that Date 20-year Nominal T-bond Rate on that Date 30-year Nominal T-bond Rate on that Date 6/20/2006 4.70% 4.92% 5.24% 5.23% 5.13% 5.15% 5.33% 5.19% b) Complete the following tables (see example below): 10-Year Bond Purchased for $1000 5 Years Ago Original Value Coupon Rate (From table above at the chosen date from 5 years ago, the original 10-year Nominal T-bond Rate divided by 2 for semi-annual payments) Current 5-Year Yield to Maturity (The most recent 5year Nominal T-note Rate reported at the Fed site divided by 2 for semi-annual payments) Number of Semi-Annual Periods Remaining Current Value* Gain or Loss on the Bond over the 5 years *Current Value = PVBond = Coupon Payment 1 1 (1.00775)10 PVB = $25.75 0.00775 $1000 5.15%/2 = 2.575% 1.55%/2 = 0.775% 10 See below. See below. + 1 $1000 10 (1.00775) = $25.75[9.58663801] + $1000[0.92570356]= $246.86 + $925.70 = $1,172.56 I compare this value with the initial investment of $1000 at par. 20-Year Bond Purchased for $1000 5 Years Ago Original Value Coupon Rate (From table above at the chosen date from 5 years ago, the original 20-year Nominal T-bond Rate divided by 2 for semi-annual payments) Current 15-Year Yield to Maturity (Take the average of the most recent 10- and 20-year Nominal T-bond Rates reported at the Fed site, and then divide this average rate by 2 for semi-annual payments) Number of Semi-Annual Periods Remaining $1000 5.33%/2 = 2.665% 15 year average: (2.97% + 3.99%)/2= 3.48% Semi-annual: 3.48%/2 = 1.74% 30 3 Current Value* Gain or Loss on the Bond over the 5 years *Current Value = PVBond = Coupon Payment 1 1 (1.0174) 30 PVB = $26.65 0.0174 See below. See below. + 1 $1000 30 (1.0174) = $26.65[23.21825346] + $1000[0.59600239]= $618.77 + $596.00 = $1,214.77 I compare this value with the initial investment of $1000 at par. 4