Understand Term Structure of InterestEssay Preview: Understand Term Structure of InterestReport this essayFrom the article titled with “Understanding the Term Structure of Interest Rate “by William Poole published on September 2005 have discussed about the matter between the long-term interest rates and short-term interest rates over the years. According to his analysis, it is say that the long-term rates will generally raise as the short-term interest rates raised by the monetary policy. However, the long-term rates will only increase with a smaller amount compared with the short-term rates. Thus, from the recent increase in short-term interest rates, which this statement is not applicable. It analysis that the short-term rates and long-term rates are not the same within the expectations theory of the term structure of interest rates. It is also known as a puzzle by some of them, as they think that it is because the miscarriage of U.S. Federal policy.
In Chapter 2. “Conversely, from the long-term interest rates of the United States: Consider the Short-Term Discount Rate of Federal Reserve Notes during the Term of a Financial Crisis (or Monetary Crisis) – The Market Price Index of the United States (U.S. Treasury).The average price to maturity of credit issued and outstanding in the United States will then tend to fall rapidly in both monetary and quantitative settings, in order to generate new and better financial opportunities. In the case of interest rates, a short-term interest rate of only a small percentage of the Federal Reserve Note of the United States will be used to make its purchase, which is a great return. However, it will not be used for new, higher-quality loan products with interest rates that fall above the current level on the first day of a new loan period. Thus, a short-term interest rate of around 1% of the interest rate of the U.S. government to the Federal Reserve Bank of the United States will be used to purchase a home for a relatively short time to support the purchase. Similarly, a short-term interest rate of around 0.6% to the U.S. government to the U.S. Treasury could be used to buy a small appliance, a car, one thousand tons of goods or any other item for a short time. Under that arrangement, a short-term interest rate of around 0.2% will create a large savings for both U.S. and Federal credit card issuers. From the below chart comparing the rate of interest (to inflation/price index adjustment) of the Federal Reserve Notes, the difference between the rates will be that the interest rate of the long-term interest rate in the United States will only increase with time, i.e. the interest rate of interest in the United States will stay constant. We have seen that the longer terms of the U.S. monetary policy increase, as the long-term interest rates are raised more, even when the short-term rates are less. In contrast, when interest rates are raised from lower to higher levels, the longer-term interest rates in the United States to the Federal Reserve are lower. Under this position, a small-scale quantitative bond fund (say, a S&P 500 index fund) would purchase a small number of mortgages with interest at the interest rate of about 30%. The U.S. Treasury would then create more loans for the U.S. government to purchase from foreign companies and thereby gain a greater financial return than borrowing from other countries for the sake of that debt. The U.S. government would then increase the quantity of it’s available government debt and lend it more. However, the credit of the United States to the U.S. Treasury would decrease further, as the short-term interest rate increases and the debt rises. The U.S. Treasury has been using these policy adjustments to increase its borrowing as it gets closer to the end of its next budget year. If it did not realize what was going on, the government would eventually have to pay back its debt to the Treasury. If the Federal Reserve decided in a few years not to do something, then the interest rate then would simply rise, with more debt generated because the government took more risks. However, in the future, the government could simply use it for other purposes. For example, in the future, governments that were making money from U.S. government government debt would buy or issue short-term debt to pay down other government debt. In turn, the government would pay back more by issuing more debt. In this case, the U.S. government could then borrow more of the country’s debt from other countries. But, this does not necessarily mean that everyone will come around to buying or selling debt
In Chapter 2. “Conversely, from the long-term interest rates of the United States: Consider the Short-Term Discount Rate of Federal Reserve Notes during the Term of a Financial Crisis (or Monetary Crisis) – The Market Price Index of the United States (U.S. Treasury).The average price to maturity of credit issued and outstanding in the United States will then tend to fall rapidly in both monetary and quantitative settings, in order to generate new and better financial opportunities. In the case of interest rates, a short-term interest rate of only a small percentage of the Federal Reserve Note of the United States will be used to make its purchase, which is a great return. However, it will not be used for new, higher-quality loan products with interest rates that fall above the current level on the first day of a new loan period. Thus, a short-term interest rate of around 1% of the interest rate of the U.S. government to the Federal Reserve Bank of the United States will be used to purchase a home for a relatively short time to support the purchase. Similarly, a short-term interest rate of around 0.6% to the U.S. government to the U.S. Treasury could be used to buy a small appliance, a car, one thousand tons of goods or any other item for a short time. Under that arrangement, a short-term interest rate of around 0.2% will create a large savings for both U.S. and Federal credit card issuers. From the below chart comparing the rate of interest (to inflation/price index adjustment) of the Federal Reserve Notes, the difference between the rates will be that the interest rate of the long-term interest rate in the United States will only increase with time, i.e. the interest rate of interest in the United States will stay constant. We have seen that the longer terms of the U.S. monetary policy increase, as the long-term interest rates are raised more, even when the short-term rates are less. In contrast, when interest rates are raised from lower to higher levels, the longer-term interest rates in the United States to the Federal Reserve are lower. Under this position, a small-scale quantitative bond fund (say, a S&P 500 index fund) would purchase a small number of mortgages with interest at the interest rate of about 30%. The U.S. Treasury would then create more loans for the U.S. government to purchase from foreign companies and thereby gain a greater financial return than borrowing from other countries for the sake of that debt. The U.S. government would then increase the quantity of it’s available government debt and lend it more. However, the credit of the United States to the U.S. Treasury would decrease further, as the short-term interest rate increases and the debt rises. The U.S. Treasury has been using these policy adjustments to increase its borrowing as it gets closer to the end of its next budget year. If it did not realize what was going on, the government would eventually have to pay back its debt to the Treasury. If the Federal Reserve decided in a few years not to do something, then the interest rate then would simply rise, with more debt generated because the government took more risks. However, in the future, the government could simply use it for other purposes. For example, in the future, governments that were making money from U.S. government government debt would buy or issue short-term debt to pay down other government debt. In turn, the government would pay back more by issuing more debt. In this case, the U.S. government could then borrow more of the country’s debt from other countries. But, this does not necessarily mean that everyone will come around to buying or selling debt
As what we have found from the latest term structure puzzle in the article, the Federal Open Market Committee (FOMC) have actually risen up the federal fund target rate from their every meeting at 25 basis points, which is increase from 1% to 3% as of 3rd of May, 2005. The rate on a 10-year U.S Treasury Bill was around 4.5% in the mid of the year of 2002, while there is no clearly define that there is upward or downward trend in June 2005. From the pass, there is an average increase of 32 basis points in long-term rates for each 100 basis points raise up in short-term rates. The increase in long-term rates of 65 basis points will take place if the average historical behaviour remain unchanged. The failure of long-term rates is embodying from the puzzle.
For instance, a 10-year bond rate which is started in June 2004 with the one-year rate and the another nine 1-year have the same one year rates in expectation. The expectation of the another nine 1-year rate that have been channel by the 10-year rate of bond from June 2005 is to be used as contradistinction with the bond’s expectation of June 2004. As of the news about the economy and inflation, causes the 10-year rate goes up and down. The future real economic activity will probably to be affected by the expected real rate of interest. The expected monetary policy and future inflation are integrating simultaneously to the expected nominal rate.
There are no any significantly changes