Using the links below, answer the following questions:

Go to

http://research.stlouisfed.org/fred2/data/GS30.txt for data on the 30 US GS

Go to

http://research.stlouisfed.org/fred2/data/BAA.txt for data on the BAA corporate

bond (30 year)

a) (5 points) Calculate the risk premium between these two bonds for December,

2007 (beginning of Great Recession) and compare to the risk premium for

December 2008 (in the midst of the Great Recession)

b) (10 points) Now draw bond supply - bond demand diagrams (side by side) with

the baa corporate bond market on the left and the 30 year US GS market on the

right. Label as point A, the conditions that existed in December 2007 - be sure to

label your bond demand curves accordingly (subscript 12/07). Note that we don't

know the prices of these two bonds but we do know what happens to the prices.

Now add in the new conditions that existed in December of 2008. We are holding

the supply of both bonds constant in this example.

c) (5 points) Now explain why your diagram has changed the way it has, being sure

to relate your discussion to your answer in part a)