A) Given the following data on yield of 10 year Treasury Notes and 10 years TIPs

Question

A) Given the following data on yield of 10 year Treasury Notes and 10 years TIPs (Treasury Inflation Protection Securities), what conclusion do you draw about changes in investors' expectation of inflation rates in the US during the past two years? Show how you arrived at your answer.

10 year T-note Yield 10 year TIPS yield

Summer 2012 1.48% - 0.70%

NOW 2.51% 0.25%

B) explain your anwer to part (a). That is, explain the differences between the yield on TIPS and the yield on regular Treasury Securities. Brief discussion on any factor in addition to inflation expectations that might affect the relationship between yield on TIPS and yield on Treasuries.

C) is the change in the required real yeild on 10 year treasuries implied by the above data consistent with an improvement in investor expectations for future grwoth in the economy or with declinging real growth expectation? Explain.

Explanation / Answer

Investors who pay attention to the financial media will often hear three different terms as it relates to government bonds: Treasury bills, Treasury notes, and Treasury bonds. The securities are similar in that all are issued by the United States to fund its debt, and all are backed by the full faith and credit of the U.S. government. There are two key differences between the three types of U.S. Treasuries, however: their maturity dates and the way that they pay interest.

How Treasury Securities Work

First, let

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