11

Term Structure of Interest Term Structure of Interest RatesRates

Project One 2007Project One 2007

22

33

44

55

6 Month Treasury Bill- TB6MS6 Month Treasury Bill- TB6MS

66

10 Year Treasury Rate-GS1010 Year Treasury Rate-GS10

77

0

4

8

12

16

60 65 70 75 80 85 90 95 00 05

GS10 TB6MS

88

Term=GS10–tb6ms, 1958.12 -2007.04Term=GS10–tb6ms, 1958.12 -2007.04

-4

-2

0

2

4

60 65 70 75 80 85 90 95 00 05

TERM

99

6 Month Treasury Bill- TB6MS6 Month Treasury Bill- TB6MS

1010

Analysis of termAnalysis of term Is term stationary, i.e. are GS10 and TB6ms co-Is term stationary, i.e. are GS10 and TB6ms co-

integrated?integrated? Is term normally distributed?Is term normally distributed? What is your best autoregressive model for term?What is your best autoregressive model for term? Estimate your best ARMA model for term through Estimate your best ARMA model for term through

April 2006 and see how well a forecast from this April 2006 and see how well a forecast from this model fits the next 12 months.model fits the next 12 months.

Re-estimate through April 2007 and forecast term Re-estimate through April 2007 and forecast term for the remaining months of 2007for the remaining months of 2007

1111

1212

Forecast Within Sample: ‘06:05-07:04Forecast Within Sample: ‘06:05-07:04

1313

-4

-2

0

2

4

60 65 70 75 80 85 90 95 00 05

TERMFORECASTWS

FORECASTWS+2*SEFSFORECASTWS-2*SEFS

1414

1515

-4

-2

0

2

4

60 65 70 75 80 85 90 95 00 05

TERMFORECAST

+2*SEFFORECAST-2*SEF