Cool Yield Curve Website

 

Well, the semester has started, and, if you're anything like me, you are always on the lookout for interesting exercises and examples to use in the introductory corpfin course. I came across a very slick web-based interactive yield curve illustration you may want check out.

Go to http://www.smartmoney.com/ and run down the opening page until you get to the item entitled "What the Yield Curve Tells Us." Click on that, and you'll see a very nicely done applet which depicts changes in yield curve froin "movie fashion" March, 1977 to August, 1998.

If you're going to assign students to check out this website (without you first going through it in class), be aware that the applet runs very quickly through the twenty-year period. Students who just "click and go" are probably going to wonder what the big deal is.

Instead, you may want to suggest that they click on the "diamond" sitting on the time line below the yield curve graphic and run it more slowly, run it backward and forward, and in various subperiods. For example, running slowly back and forth between 1977 and 1982 clearly illustrates the financial agonies of the Carter era, and the combined effects of stagflation, oil shocks, and general economic disruption on the credit markets. (The graphic shows better than I can describe the 6-month Treasury rate going from under 5 percent to over 15 percent in approximately 24 months. Watching what is literally an upheaval in the credit markets will cause those of you 40 and older to feel a cold chill run down your spine, ending at your wallet.)

In addition to the great graphic, the adjacent frame contains a nice layman's discussion of the yield curve, as well as point-and-click discussions how one interprets various shapes. (The creator of the feature provides information on GDP and stock market performance in the periods following the shape in question).

I plan to use this web page in class as a means of illustrating the Fisher Effect, the relationship between the yield curve and macroeconomic activity and, of course, the relationship between bond prices and interest rates. All in all, this little exercise should provide some interesting classroom discussions (particularly if your classroom is wired) related to Chapter 7 in RWJ Fundamentals 4/e and Chapter 6 in Essentials 2/e. Enjoy!

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