In response to the global financial crisis, Federal Reserve leaders continue to keep the short-run target interest rate near zero. While the Fed controls short-term interest rates, long-term interest rates essentially depend on supply/demand dynamics, as well as longer-term interest rate expectations.
Consider the following annualized rates for 3-month Treasury yields and 10-year Treasury yields. The entire data set, labeled Yields, can be found on the text website.

a. Construct and interpret a scatter plot of a 10-year treasury yield against a 3-month yield.
b. Determine the sample regression equation that enables us to predict the 10-year yield on the basis of the 3-month yield.
c. Interpret the coefficient of determination.
d. At the 5% significance level, is the 3-month yield significant in explaining the 10-year yield?
e. Many wonder whether a change in the 3-month yield implies the same change in the 10-year yield. Verify this hypothesis at the 5% significancelevel.

  • CreatedJanuary 28, 2015
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