Interest Rates and Bond Valuation Worksheet Part

I: Go to the Federal Reserves Web site to examine historical monthly interest rates on 10-year government bonds at http://www.federalreserve.gov/datadownload/Output.aspx?rel=H15&series=0809abf197c17f1ff0b2180fe7015cc3&lastObs=&from=&to=&filetype=csv&label=include&layout=seriescolumn 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.htm 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 textbooks 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 Reserves 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 ________

Moodys seasoned Corporate Bonds Aaa ________ Baa ________ Provide in the space below an explanation for the determination of the latest monthly rate on Moodys seasoned corporate bonds rated Baa based on the above rates and the factors that determine nominal interest rates.