Yellen's Talk of Hot U. Economy Extends October LongBond Rout Bloomberg Yellen's Talk of Hot U. Economy Extends October Long-Bond Rout by Brian...

FINC 3321 Dr. Durmaz CASE – 1 Due: 3/12 11:00 pm Case Study Instructions: Case studies must be typed using 12-point Times New Roman font with 1-inch margins all around. No cover sheet is necessary. Place your name in the header at the top of each page. Case studies should not exceed 3 pages in length. The bulk of your grade will be based on your ability to perform the requested analyses and provide an accurate interpretation. However, spelling, grammar, and syntax are also part of the overall grade, as poor writing can make it difficult to evaluate your responses. Please read the attached article: “Yellen’s Talk of Hot U.S. Economy Extends October Long-Bond Rout” Part I (90%) Discussion Questions 1. What is the yield curve? Why is does it almost always slope upward? What influences its slope? 2. Explain why the yield curve would steepen due to what Janet Yellen said about letting the economy "run hot." 3. What is an inflation risk premium? What effect does the inflation risk premium have on the yield curve? Explain why undershooting unemployment rates and overshooting on price growth should argue for a steeper yield curve and higher inflation risk premiums, as was stated in "Yellen’s Talk of Hot U.S. Economy Extends October Long-Bond Rout" (Businessweek.com, October 15, 2016). 4. Why would the Fed want to produce inflation? How would that be healthy for the economy? 5. What is the ten-year break-even rate? How is it calculated? Explain how it can serve as a gauge of inflation expectations. 6. What interest rates does the Federal Reserve directly control? Why is it common to speak about the Fed controlling interest rates, as if it controlled all of them?

Part II (12%) Quiz Questions  Fill in the Blank 1. The chair of the Federal Reserve is _____ _____. 2. The ten-year break-even rate is used by analysts as a gauge of _____.  True or False 3. The yield curve steepened at the end of the week that the article was written because long-dated bonds were outperforming shorter-dated bonds in terms of price increases. 4. Undershooting unemployment rates and overshooting on price growth should steepen the yield curve and reduce inflation risk premiums. 5. Inflation has for years been dormant in the United States and developed nations, a key reason the Fed has held off on raising interest rates in 2016. 6. Longer-dated debt offers higher yields but is more sensitive to inflation expectations.