Current information on rates is also available on the investinginbonds.com site.

http://www.bondmarkets.com
http://www.investinginbonds.com

5 In 1997 the Treasury began issuing inflation-indexed bonds called TIPS (for Treasury Inflation Protected Securities) which offer protection against inflation uncertainty. We discuss these bonds in more detail in Chapter 14. However, the vast majority of bonds make payments that are fixed in dollar terms; the real returns on these bonds are subject to inflation risk.

I. Introduction 5. History of Interest Rates and Risk Premiums

The McGraw−Hill

Companies, 2001

146 PART I Introduction

WEBSITES The sites listed below contain current and historical information on a variety of interest rates. Historical data can be downloaded in spreadsheet format and is available through the Federal Reserve Economic Database (FRED)

http://www.stls.frb.org/
http://www.stls.frb.org/docs/publications/mt/mt.pdf

PROBLEMS 1. You have $5,000 to invest for the next year and are considering three alternatives:

a. A money market fund with an average maturity of 30 days offering a current yield of 6% per year.

b. A one-year savings deposit at a bank offering an interest rate of 7.5%.

c. A 20-year U.S. Treasury bond offering a yield to maturity of 9% per year. What role does your forecast of future interest rates play in your decisions?

2. Use Figure 5.1 in the text to analyze the effect of the following on the level of real in- terest rates:

a. Businesses become more pessimistic about future demand for their products and de- cide to reduce their capital spending.

b. Households are induced to save more because of increased uncertainty about their future social security benefits.

c. The Federal Reserve Board undertakes open-market purchases of U.S.