Answer the following questions using the attached picture: 1) Explain what your

Question

Answer the following questions using the attached picture:

1) Explain what your graph is showing. What has happened to Treasury rates over the past ten years? Are rates higher or lower than they were five years ago and ten years ago? How much have they changed? Are these all normally shaped yield curves? If not, what does that tell you?

2) Why do you think the yield curves have changed over the over the past decade? What has happened in the US economy or with Federal Reserve activity to cause the changes in US Treasury yields over the last 10 years?

Citrix Viewer View Devices 4/) 43% D' Mon Nov 6 12:52:27 AM Q +E FACTSET.Q Learning Portal Todays Top News Markets Quotes ChartingEconomics Industry Filings screening Portfolio Ownership Graph Al dentrters CHARTS United States Treasury Yield Curve PLOT OPTIONS 5.0 11/03/2017 - Yield11/03/2016 - Yield 11/02/2012-Yield 11/02/2007-Yield - 4.5 Curve 1: Previou8 Clo86 4.0 Curve 3: Five Years Ago + Curve 3.5 + Spread 3.0 2.5 2.0 1.5 0.5 0.0 1 3M 6M 1Y 2Y 3Y 5Y TY 10Y 30Y CHART LABELS Price valuation 6

Explanation / Answer

1) a)The graph shows four treasury yield curves including current period yield curve, yield curve a year ago, a yield curve five years ago and a yield curve 10 years ago. Over the course of 10 years, the interest rate fell and bottomed out five years ago as is shown by the yield curve from five years ago placed at the bottom. In the past five years, the interest rates have started increasing again as shown by yield curve from one year ago and current yield curve placed above yield curve five years ago.

b) As the current yield curve is placed between yield curve from ten years ago and yield curve from five years ago, it can be deduced that the current interest rates are lower than the rates 10 years ago but higher than the interest rates five years ago. The only exception is 30 years maturity treasuries for which the interest rate is lowest currently.

c) The rate of change is different for treasuries of different maturities. For example, a One year treasury commanded 3.75 percent interest rate 10 years back, while 5 years ago the interest rate dipped 0.25 percent. The current interest rate for one year treasury is 1.5 percent.

d) A normal yield curve is upward sloping to denote higher yield for longer term treasuries compared to shorter-term treasuries. This is so in order to compensate longer term treasuries for extra risk associated with time.

e) If the yield curve are inverted which shows higher interest for short term treasuries, it may indicate upcoming recession as it shows poor long-term outlook.

2) The curves show fall in interest rate. It seems that the Fed eased the money supply in the economy by lowering the interest rate during the first five years of the previous decade. However, after this, the interest rates were raised again, tightening the money supply in the US economy.

3) The price of the treasury bonds bears inverse relation to the interest rate, the value of the portfolio bought ten years ago will be high currently, on account of lower interest rate. The trend of the interest rate for 30 years bonds show that the rate bottomed out a year ago and currently on the rise again. So, it is not advisable to currently buy 30 years bonds as those would be priced higher on account of low interest rate. It is advisable to wait for interest rate increase so as to buy bonds at lower price.

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