Objective: Assess students’ understanding of the yield curve, maturity premium (
ID: 2787960 • Letter: O
Question
Objective: Assess students’ understanding of the yield curve, maturity premium (MP), default risk premium (DRP, aka credit spreads), and real interest rate (IRP).
Use the following web links to gather data for your assignment.
https://www.bloomberg.com/markets/rates-bonds/government-bonds/us
https://www.gmsgroup.com/municipal-bond-composite-rates
https://www.gmsgroup.com/corporate-bond-composite-rates
http://inflationdata.com/inflation/inflation_rate/CurrentInflation.asp
1. Note down the rates of return, for different maturity periods, for all bond categories available.
Bond type
2-year
5-year
10-year
Treasury
Municipal Aaa
Municipal Aa
Municipal A
Corporate Aaa
Corporate Aa
Corporate A
2. Compute estimates of (show your work):
(i) Maturity premium for all three maturities. Do you detect a pattern? If yes, please describe it.
(ii) Default Risk Premium for different credit ratings (you select a maturity). Do you detect a pattern? If yes, please describe it.
(iv) The 2-year real risk-free rate.
3. Do additional reading / research as required and answer the following questions.
(i). For the same maturity, why is the yield on municipal bonds less than that on Treasury bonds?
(ii) Why is the yield on corporate bonds higher than that on Treasury bonds?
Bond type
2-year
5-year
10-year
Treasury
Municipal Aaa
Municipal Aa
Municipal A
Corporate Aaa
Corporate Aa
Corporate A
Explanation / Answer
I am answering the first question. Please ask other questions separately to get them answered.
From the links provided, we can observe the asked rates. They have been reproduced in the table below:
Bond type 2-year 5-year 10-year Treasury 1.720% 2.070% 2.370% Municipal Aaa 1.270% 1.508% 1.967% Municipal Aa 1.252% Not Available Not Available Municipal A 1.327% 1.806% 2.373% Corporate Aaa Not Available Not Available Not Available Corporate Aa 1.556% 2.471% 3.030% Corporate A 2.028% 2.598% 3.168%Related Questions
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