You have been retained by the fixed income desk of Baek-Brooklyn Investment Group to provide a…

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You have been retained by the fixed income desk of Baek-Brooklyn Investment Group to provide a

forecast about future short term interest rates, namely, the 3 month t-bill rate. You decide to use

two sources of data: historical interest rate data and current forward rates. The data necessary for

this forecasting exercise are contained in the Excel file (Project1 2020.XLSX), which you can find

on the course web site. This dataset contains daily observations of the 3 month t-bill rate until

April 12, 2017, as well as the Treasury Strip Price data on April 13, 2017. You must write a report

including all relevant information and computations, and provide a forecast for an horizon ranging

between 6 months and 5 years. Follow the steps below.

1. Let us denote by rt the Bond Equivalent Yield (BEY) on day t. The data on DTB3

in Project1 2020.XLSX are quoted on a discount basis. Use the below formulas to obtain

a time series of Bond Equivalent Yield (BEY) (n=90). Refer to the below equations and you

will easily compute a time series of bond equivalent yield.

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