Consider the interest rates on securities with various terms to maturity, shown in Table 12.5.18.
a. Find the regression equation to predict the longterm interest rate (Treasury bonds) from the two shorter-term rates.
b. Create a new variable, €œinteraction,€ by multiplying the two shorter-term rates together. Find the regression equation to predict the long-term interest rate (Treasury bonds) from both of the shorter-term rates and the interaction.
c. Test whether there is any interaction between the two shorter-term interest rates that would enter into the relationship between short-term and long-term interest rates.

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TABLE 12.5.18 Interest Rates Federal Funds (overnight) (3-month (10-year) 3.52% 3.02 4.21 5.83 5.30 5.46 5.35 Treasury Bills Treasury Bonds Year 1992 1993 1994 1995 1996 1997 1998 3.43% 3.00 4.25 5.49 5.01 5.06 4.78 7.01% 5.87 7.09 6.57 6.44 6.35 5.26 5 600602 036 866 321279 654444443 60317 5311134 487352722 6132909 4631113451 928 01234567 1222222222