eco455 homework assignment

1)
(20 points total) Using the links below, answer the following
questions:

Go to .stlouisfed.org/fred2/data/GS30.txt”>http://research.stlouisfed.org/fred2/data/GS30.txt
for data on the 30 US GS

Go to .stlouisfed.org/fred2/data/BAA.txt”>http://research.stlouisfed.org/fred2/data/BAA.txt
for data on the BAA corporate bond (30 year)

a)
(5 points) Calculate the risk
premium between these two bonds for December, 2007 (beginning of Great
Recession) and compare to the risk premium for December 2008 (in the midst of
the Great Recession)

b)
(10 points) Now draw bond
supply – bond demand diagrams (side by side) with the baa corporate bond market
on the left and the 30 year US GS market on the right. Label as point A, the
conditions that existed in December 2007 – be sure to label your bond demand
curves accordingly (subscript 12/07).
Note that we don’t know the prices of these two bonds but we do know
what happens to the prices. Now add in
the new conditions that existed in December of 2008. We are holding the supply
of both bonds constant in this example.

c)
(5 points) Now explain why your diagram has changed the
way is has being sure to relate your discussion to your answer in part a)

2)
(20 points total) Use the links
below to answer the following questions:

Go to .stlouisfed.org/fred2/data/GS10.txt”>http://research.stlouisfed.org/fred2/data/GS10.txt
for data on the 10 year US GS

Go to .stlouisfed.org/fred2/data/TB3MS.txt”>http://research.stlouisfed.org/fred2/data/TB3MS.txt
for data on the 3 month T-bill

a)
(10 points) In the space below,
draw a yield curve representing the conditions as of December 2007 along with
drawing another yield curve representing the conditions as of December 2008. Be
sure to label your yield curves with the date as a subscript.

b)
(10 points) What has happened to the position and slope
of the yield curve and are these results consistent with the three term structure
facts? Be sure to refer to each term
structure fact and apply it to this example.