Calculate interest rate forecasting, Financial Accounting

Assume that we are in December 2009 and try to make forecasts of the five year interest rate at the end of January 2010. For this question, you just need to fill out the blank space provided (if any) for each question - no further materials should be submitted.

1) First, download the interest rate data file (Assignment 2_Winter 2011_interest rate forecasting data.xls) from the Assignment Folder at the course website. The data should go from January 1972 until July 2010. In this file, interest rates are in percentage points. For example, in cell C2, you will see: 3.763708 - this means the 3 month interest rate as of end of January 1972 is 3.763708%. This is just a preparation, you don't have to report anything here.

2) Second, construct the level, slope and curvature factors as follows:

Level = 3 month rate

Slope = 10 year rate - 3 month rate

Curvature = (3 month rate + 10 year rate) - 2 × 2 year rate

Since we are at the end of 2009, remember to limit your construction of these factors up to December 2009. Again, this is just a preparation, you don't have to report anything here.

3) Regress the contemporaneous 5 year rate over the same period (from January 1972 to December 2009) on these three factors to determine how the 5 year rate can be approximated by Level, Slope, and Curvature. Report the regression coefficients and the regression R2 statistics. That is, report a, b, c, and d in the simple linear regression equation below:

5 year rate = a + b × Level + c × Slope + d × Curvature + error

and the R2 statistics of this regression.

To answer this question, fill in the blank spaces below:

5 year rate = ________ + _______ × Level + _______ × Slope + _______ × Curvature

R2 statistic = _______.

4) Use the estimated coefficients from part 3) above, a, b, c, and d, to construct the approximate 5 year interest rate as: a + b × Level + c × Slope + d × Curvature. Plot below this approximate series together with the actual 5 year interest rate series in the data to see how close these two series match up.

5) Regress one month ahead Level factor on the current values of Level, Slope and Curvature factors and report the regression coefficients. That is, report a, b, c, and d in the following regression equation:

Level one month down the road = a + b × Level + c × Slope + d × Curvature+ error

Note that a, b, c, and d here are different from those in parts 3) and 4) above. Given the values of Level, Slope, and Curvature in December 2009, what would be your prediction of the Level factor at the end of January 2010?

To answer this question, fill in the blank spaces below:

Level one month down the road = _______ + _______ × Level + _______ × Slope + _______ × Curvature

Prediction of the Level factor at end of Jan 2010 = _______.

6.) Repeat part 5) above for the Slope factor. To answer this question, fill in the blank spaces below:  

Slope one month ahead = _______ + _______ × Level + _______ × Slope + _______ × Curvature

Prediction of the Slope factor at the end of January 2010 = _______.

7) Repeat part 5) above for the Curvature factor. To answer this question, fill in the blank spaces below:

Curvature one month down the road = _______ + _______ × Level + _______ × Slope + _______ × Curvature

Prediction of the Curvature factor at end of January 2010 = _______.

8) Given the prediction of the Level factor obtained from part 5), the prediction of the Slope factor obtained from part 6), and the prediction of the Curvature factor obtained from part 7), what would be your prediction of the 5 year interest rate at the end of January 2010? To answer this question, fill in the blank spaces below:

Prediction of the 5 year interest rate at the end of January 2010 = ______.

Posted Date: 2/28/2013 6:12:10 AM | Location : United States







Related Discussions:- Calculate interest rate forecasting, Assignment Help, Ask Question on Calculate interest rate forecasting, Get Answer, Expert's Help, Calculate interest rate forecasting Discussions

Write discussion on Calculate interest rate forecasting
Your posts are moderated
Related Questions
Q. Which of the following is not true of a corporation? a. It may buy, own, and sell property. b. It may sue and be sued. c. The acts of its owners bind the corporation. d. It may

On January 1, 2012, Osborn Company sold 12% bonds having a maturity value of $800,000 for $860,651.79, which provides the bondholders with a 10% yield. The bonds are dated January

Introduction to Pension funds Pension funds are normally set up to provide pension benefits to employees who have retired. The pension funds receive contributions mainly from e

How do you create an Excel document with several financial statements, all linked together with specific financial data?

Funding the investment by an issue of ordinary shares could tender several advantages to Springbank plc. Gearing would drop to 47% (3·5/7·4) fewer than half of the sector average o

Income Statement 2013 2012 2011 Vertical Anaylsis Vertical Anayl Horizontal Net revenue 5,075,390 4,763,180 4,158,507 year 1 year 2 Anaylsis Cost of goods 1,377,242 1,297,102 1,134

Since 1968, Dracula Limited has traded in Doncaster, South Yorkshire as a manufacturer of fancy-dress and theatrical costumes. It produces a wide range of general theatrical costum

A company that uses the perpetual inventory system purchased $8,500 worth of inventory on September 25. Terms of the purchase were 2/10, n/30. The invoice was paid in full on Octob

Olivia has received a $15 gift certificate that is redeemable only for roasted peanuts. Bags of roasted peanuts come in two sizes, regular and jumbo. A regular bag contains 30 pean

In the current year, Madison Corporation had $50,000 of taxable income at a tax rate of 25%. During the year, Madison began offering warranties on its products and has a warranty l