Investigate the data available from the Federal Reserve Bank of St. Louis FRED database at https://fred.stlouisfed.org/. Then answer the following questions.
A. What is the difference in the interest rates on commercial paper for financial firms versus nonfinancial firms?
B. What was the interest rate on the one-month Eurodollar at the end of 2022?
C. What is the most recent interest rate reported for the 10-year Treasury note?
Interest Rates and Inflation
One of the largest influences on the level of interest rates is inflation. A number of sites report inflation over time. Go to the Federal Reserve Bank of St. Louis, FRED database Web site at https://fred.stlouisfed.org/ and find the consumer price index for all urban consumers. Click on percent change from the previous year, which calculates the inflation rate. What has the average rate of inflation been since 1950, 1960, 1970, 1980, and 1990? Which year had the lowest level of inflation? Which year had the highest level of inflation?
Increasing prices erode the purchasing power of the dollar. It is interesting to compute what goods would have cost at some point in the past after adjusting for inflation. Go to the Federal Reserve Bank of St. Louis, FRED database Web site at https://fred.stlouisfed.org/ and find the consumer price index for all urban consumers. What would a car that cost $25,00 today have cost the year that you were born? (To find this, multiply the $25,000by the price index in the year you were born and divide by the price index today.)
One of the points made in this chapter is that inflation erodes investment returns. Go to www.moneychimp.com/articles/econ/inflation_calculator.htm and review how changes in inflation alter your real return. What happens to the adjusted value of an investment compared with its inflation-adjusted value as
A. inflation increases?
B. the investment horizon lengthens?
C. expected returns increase?
The Risk and Term Structures of Interest Rates
The amount of additional interest investors receive due to the various risk premiums changes over time. Sometimes the risk premiums are much larger than at other times. For example, the default risk premium was very small in the late 1990s, when the economy was so healthy that business failures were rare. This risk premium increases during recessions.
Go to the Federal Reserve Bank of St. Louis FRED database at https://fred.stlouisfed.org/ and find the interest-rate listings for Aaa- and Baa-rated bonds at three points in time: the most recent; August 1, 2007; and October 1, 2008. Prepare a graph that shows these three time periods (see Figure 5.1 for an example). Are the risk premiums stable or do they change over time?
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