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Ploting the current yield curve - Research Paper Example

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Ploting the current yield curve

The yield curve shows a declining trend of Average Interest Rates for both the marketable and the non-marketable treasury securities in the US security market. It shows a negative gradient on the curve for a period of 13 years for the purpose of making qualitative comparison. For the entire period, the best period of interest for trading is 2013, since the interest rates are on the rise yet the results are for the yields for the first half of the year. It is a declining performance indicator showing that the interest rate is likely to continue falling in the coming years if all factors remain constant. The average rates of interest for the US Treasury Securities are computed using the total debts that are bearing interests, though they are not matured. There are certain US securities that are not included in the calculation of the average rates of interest, overall marketable and non-marketable debts as well as debts that bear interests. This is because these US securities do not have protection against the effects of inflation according to Fabozzi (2008). Question 2: Answer The description of the interest rates trend over the past many years is a derivative of the interest rates shown in the table below. Maturity Year Interest Rate 1987 5.78 1988 5.452 1989 5.164 1990 5 1991 4.6789 1992 4.548 1993 4.244 1994 3.94 1995 2.988 1996 2.132 1997 1.969 1998 1.827 1999 1.478 2000 1.432 2001 1.3979 2002 1.2 2003 1.177 2004 1.089 2005 1.054 2006 0.947 2007 0.859 2008 0.67 2009 0.36 2010 0.15 2011 0.134 2012 0.087 2013 0.04 2018 0.01 Figure 2: Interest Rates Interest rates in the curve are in a continuous trend of gradual decrease from 1987 to 2013, with a projected forward movement projected in the years after 2013. The period shows results for the last 28 years. The only year that indicates a drop is 2012, perhaps caused by temporary factors based on the market variables of the US Treasury Securities. The securities market is heading to a point where the rates are constantly reducing. The same trend is presented in the report by the head of research on securities and rates in the global scene. The research team explained that the rates of interests fell within ten years at a rate of 1.58 percent per year because investors turned to government debt in an attempt to salvage the future of their businesses (Slane, 2004). The decline in the interest rates and yields is caused by the increase in treasury prices. Interest rates proceeded to reduce further as years moved on and the global banks attempt to maintain rates at their lowest in order to encourage their economic growths and encourage more lending (Friedman, 2004)). Even so, the view of reducing the speed of growth of the globe moves the rates to lower values, considering the demand which investors have for trading with safer assets. Question 3: Answer The trend shows that the interest rates progressively drop by 1.58 percent every year. It implies therefore that in 2013, the interest rate will be: Interest Rate = ((100 – 1.58) / 100) * 0.04 Interest Rate = 0.039368 The calculation can only be justified theoretically, using the hypothesis that the interes ...Show more

Summary

Plotting the Current Yield Curve Question 1: Answer Plot of the Normal current yield curve The yield curve for interest rates of US Treasury is generated from the information generated from WSJ. It is the yield for the most current trading results of various treasury securities in the US…
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