Using a Microsoft Word document (please include the work for the steps as detailed below).
1. Go to the Federal Reserve Bank of St. Louis's (http://www.stls.frb.org/) to access historical U.S. interest rate data, click on FRED, and then on "Interest Rates".
a.) Get monthly data, from January 1955 to February 2002, on the federal funds rate, the one-year Treasury bill rate, a 10-year interest rate, and interest rates on AAA and BAA corporate bonds.
b) Present a time series plot of these interest rate series and comment on their long-run co-movements.
c) Calculate the mean and standard deviation as well as the maximum and minimum values for each series over the sample period (from January 1955 to February 2002). Which were the worst and best years in terms of interest rates?
2. Calculate the contemporaneous correlations between these interest rate series.
a) Which series exhibit the strongest correlations? The weakest?
b) Do the correlation patterns you identified here manifest in the graphical representation of the series?
c) Compare the contemporaneous correlations over the whole period with those in the 1960's, 1970's, 1980's, and 1990's.
3. Present a time series plot of the spread between the interest rates on each of AAA and BAA corporate bonds and the Treasury bill rate.
a) Do these spread series show evidence of a trend?
b) Calculate the mean and standard deviation as well as the maximum and minimum values for each of the spread series.
4. It has been argued that interest rates are procyclical. (i.e. they tend to be high when the level of economic activity is high and low when the level of economic activity is low)
a) Describe how you would investigate the cyclical properties of interest rates and interest rate spreads.
b) Answer the following questions: Are risk premiums on corporate bonds procyclical or countercyclical? Why?
You will find the answer to this puzzling assignment inside...