BA 580 -- Contemporary Issues (1.5 hrs)
Understanding Interest Rates

Dr. Brian Goff/ GH 414/Phone: 745-3855/
Email: brian.goff@wku.edu/www.wku.edu/~goffbl/Games.htm
Offiice Hours ("official"):  9:30-11:30 TTh; 1:30-4:00 (MW)

Course Policies / Course Outline/ Supplemental Online Resources/ Bad Weather Contingency Policy/ Responsibilities of MBA Students / Brief Example/

Class 1 PP Notes /  Class 2 PP Notes / Class 3 PP Notes /

GRADES
COURSE POLICIES

Objectives of the course: This course highlights key institutional, analytical, and empirical features of interest rates.  The purposes are to build a better understanding of why interest rates in specific credit markets differ, why they change, and how their values influence business and personal decisions.

Resources:   Online Readings & Resources (See Course Outline)

Student expectations and requirements
Participation--    25%
Briefs          --    25%
Final Exam--      50%

Participation:  Grades will be based based  on my assessment of the quality of your contributions to class based on indications of your grasp of material and how well your comments/answers stimulate the class.  Absence influences these grades. Everyone begins the class with with an 85% rating with adjustments from there. 
Briefs:  See Instructions for Briefs
Final Exam:  The final exam will be a short-answer/ multiple choice instrument covering main topics.

MISCELLANEOUS
We have only five scheduled class dates.  This schedule has been developed with the specific intent of allowing working students to consolidate their time devoted to the class. The schedule necessitates intensive use of class time and permits little flexibility in terms of absenteeism. Consult the Bad Weather Contingency Plan for what we will do in the case of snow/ice.  Students with special needs per the ADA should register with the WKU Compiance Office and then consult with me regarding accomodations ASAP.


COURSE OUTLINE--Some Topics Subject to Change

If you have an opportunity to look over the Class 1 material prior to the class meeting, it would be helpful but it is not required.  Note that some of the excel files are used in more than one instance and contain multiple worksheets.  Where appropriate, I have indicated the specific worksheet that is applicable.

Class 1 (Jan 2): Overview of Interest Rates & Business
NY Fed -- Financial Market Overview;  NY Fed -- Banks & Fin. Institutions, pp. 1-7;  NY Fed - Lending Markets; (These three readings provide an overview of lending markets and how they fit into the economy & financial world;  There is no need to memorize all of this material; pay special attention to the role of such markets, specific sub-sections, and sizes)

A.  Interest rate & credit market foundations
B.  Rates & business decisions -- Rates&PV.xls ;  (Additional Spreadsheet examples -- tmv.xls)
C.  Facts & figures about rates and yields -- Irates.xls (basic rates worksheet);   Bond Primer (smartmoney -- need java enabled);  Investment FAQ-Bond Prices & Rates ; PP Notes

Class 2 (Jan 4):  Decomposing Rates and Rate Changes Part I
  Chicago Fed--Points of Interest (This article provides a nice overview of market influences on interest rates)
A.  Inflation & rates -- Monetary Trends (i-rates);  Irates.xls (inflation & comparisons worksheets);
B.  Risk & rates -- Irates.xls (comparisons worksheet)
C.  Specific lending markets -- SF Fed -- Fed Funds Rate & Prime Rate;  SF Fed -- Discount Rates & Mortgage Rates;         
D.  Long & short term rates (yield curve) -- ;   Yield Curve--Wikipedia; NY Fed Term Structure pp. 18-20 ; "Living Yield Curve" ; PP Notes; Irates.xls (comparisons worksheet)
E.  International influences -- Irates.xls (comparisons worksheet)

Additional Information: NY-Fed-Interest Rates   (This reading is not required but contains multiple sections indexed in the upper right corner that provide further explanations and links to longer works)

Class 3 (Jan 9). Decomposing Rates & Rate Changes Part II
A.  Fed's structure & connection to lending markets --  How the Fed Works-bankrate.com ; NY Fed-FOMC & OMO;    WSJ-Fed Monitor (subscription);
B.  Fed & rates: the issues --STL Fed - Volker Revolution; STL Fed - The Ideal Central Bank;   Phil. Fed - What The Fed Can & Can't Do; STL Fed -- Initiating or Responding 
C.  Fed & rates:  the evidence -- Irates.xls (fed worksheet);
D.  Elections, appointments, & rates -- Irates.xls (fed worksheet)

Additional Information Available from NY Fed - Fedpoints; NY Fed - Interest Rates (these readings are not required but contain multiple sections indexed in the upper right corner that provide further explanations and links to longer works)

Class 4 (Jan 11). Predicting & Offsetting Rate Movements                       
A.  Offsetting rate movements (A brief intro to hedging) -- PP Notes
B.  Using financial market information to predict rates -- STL Fed Monetary Trends (implied forward rates ...);  SF Fed -- Interest Rate Forecasts with Futures ;  Forwardsyields.xls
        Yield Curve & Inflation-Indexed Yield Curve (Monetary Trends -various);  Yield Curve--Wikipedia (especially "practice" section);
C.  Quick overview of statistical methods for predicting rates

(Jan 16): NO CLASS -- MLK HOLIDAY

Class 5 (Jan 18).
Final Exam

SELECTED SUPPLEMENTAL ONLINE RESOURCES 

NY Fed -- Debt Market Overview               
NY Fed - Rates Education Material (a concise overview of several course topics)
Investment FAQ -- Bond rates & prices 
Bond Yield Calculator (@smartmoney.com; simply tool for computing yield based on current price of bond)  
Option Price Caluclator 

Explaining Rate Levels and Changes
SF Fed -- Discount Rates & Mortgage Rates 
SF Fed -- Fed Funds Rate & Prime Rate 
LIBOR Info @ British Bankers Association
NY Fed -- What Moves Bond Market (97-long version)

Fed & Rates 
Translating Fedspeak;  Recent Fed Actions; Various Rates (Use Links @ Bankrate.com Fed Alert)
SL Fed -- Fed & Long Rates
Investment FAQ -- Fed & Irates 
NY Fed  -- Explaining Fed Policy
NY Fed -- Monetary Polciy & Rates 

Rates & Markets
NY Fed Reserve Rate Data 
St. Louis Fed Reserve Rate Data (Downloadable in Excel) 
Economagic (Monthly & Daily Rate data galore + lots more) 
Rate Data in Excel File 
  What Moves Bonds--03 Short Version
Rate Forecasting     
Financial Forecast Center "Neural Network" Rate Forecasts (short term)
Ivestopedia--Predicting Interest Rates -- Yield Curve 
Phil. Fed -- Summary of Forecasts
SF Fed -- Interest Rate Forecasts with Futures 

Living Yield Curve 
Monetary Trends -- STL Fed 

WSJ Rates (subscription required)


INSTRUCTIONS FOR BRIEFS

Overview
    Work on these briefs should proceed in two parts.  First, you will need to complete preliminary work on the briefs according the schedule indicated below.  This preliminary work will consist of a "rough draft" and notes based on the assigned readings (and related materials) that help you make comments to the class about the topic. You should turn in a copy of these notes at the assigned class and keep a copy for yourself.  These drafts may be in bulleted form or annotated notes but must be clearly legible.  The preliminary work will be a credit/no credit grade.
    Second, final versions of the briefs will be due as a single unit at the end of the course.  The final versions must be (maximum) one-page summaries written as if you are an analyst within a firm summarizing key features about the interest rate topic to company executive managers and board members. Assume that at least some of these managers and board members posses only limited knowledge of the topics involved.  You should turn these in at the final class meeting collected in a single folder.
 
Grading: 
Preliminary Credit-No Credit accounts for 50% of grade.
Remaining 50% is based on the following criteria is based on the final versions:
i)  How well does the brief accurately explain the topic?
 ii)  Is the writing clear and appropriate for the intended readers?
 iii)  What supporting material is presented -- is it appropriate and well integrated?

Details:
1.  Each brief should be typed in 12 point font, single-spaced, and no longer than one page of text. 
2.  Each brief should have a title and short introductory paragraph.
3.  Up to two supporting pages of figures, tables, examples, lists, articles or similar materials may accompany each page of text. All figures or tables should be appropriately numbered and titled.
4.  The Final Versions of Briefs should be compiled in a folder with a title page. 

Topics (The number in parenthesis indicates the class session in which preliminary brief material should be ready -- the final versions are not  due until Class 5 )
(Class 2) An overview of the (Federal Funds; Treasury Bill; London Inter-Bank; Prime) market and the associated rate -- I will assign the market
(Class 2) Choose from one of the following:
    -- Connections between inflation and interest rates
    -- Connections between risk and interest rates
    -- Main market influences on either long term or short term rates
    -- Similarities & differences in behavior of a short term rate (choose one) and a long term rate (choose one)
(Class 3)  Mechanics of Fed's connection with interest rates
(Class 3) Confusions about the Fed's influence over interest rates
(Class 4) Using market-based information to predict rate movements
(Class 4) Choose one of the following:
    -- Potential sources of interest rates influence for a non-financial business
    -- Critical interest rate assumptions in computing present value
    -- Offsetting the potentially negative effects of interest rate volatility
   


 
Bad Weather Contingency Plans
January classes, especially at night, creates a non-trivial likelihood bad weather. Here is the plan,

1) if class is officially cancelled by WKU or if you are notified of a cancellation by me
     -- Email your materials for your "Briefs" to me as a Word attachment
     -- I will post supplemental PowerPoint and/or Excel-based notes to the website that you should consult; direct questions to me via email
     -- If the final class is cancelled, I will post the Final to the website; you should follow the instructions and send it back to me via email; also, your final Briefs should be sent to me via email

2) if class is not cancelled but you live a considerable distance from campus AND hazardous conditions exist, do not endanger yourself;
    -- you may follow the procedures prescribed above without any penalty for your absence
(Please note:  this is a bad weather policy and does not pertain to other reasons for absence)


Responsibilities of MBA Students
MBA courses combine graduate education and professional business eduction both of which place much greater responsibiliites on students than undergaduate courses.   Not all of these responsibilities are easily summarized in a few lines, but the following items indicate some of the specific expectations that are significantly different than expectations in many undergraduate courses.

1. Preparation
i) students are expected to come to class having adequately read assigned material;
ii) students are expected to consider and contribute to discussions as well as how topics integrate with business decisions;
2.  Initiative
i) if a topic is unclear, the primary responsibility rests with the student to find and digest supplemental material;
ii) if a student's current or prior work experience does not provide a background for mid- and upper-level business decisions, the student should supplement his/her experiences by regularly reading the WSJ or other business periodicals;
3.  Presentation
i) When presenting material or making comments to class, students should communicate in ways that are beneficial to the group (audibly, clearly, thoughtfully, ...);
ii) While classroom settings are usually informal, students should keep in mind that an MBA is professional training -- non-verbal signals such as lack of punctuality, appearance (within accepted norms), and body language matter



Example of Brief
(This example has nothing to do with interest rates.  It deals with parking problems at WKU.  Nonetheless, it provides some insight into the elements making up a quality brief.)

WHAT IS THE NATURE OF THE PARKING PROBLEM AT WKU?
     Just as many other schools, parking presents a difficult problem for WKU.  On the surface, the problem appears relatively simple -- not enough spaces for the people who want to park.  The problem, however, is more complex than "not enough spaces."  This brief summarizes the nature of the parking problem.
     To understand the parking problem one must first look at the users.  There are multiple "types" of users who have demand for different parking characteristics based on location and time.     Among faculty and staff, some arrive early and "stay put" for the work day, while others arrive later for afternoon or evening classes and some have positions that require coming and going during the day.  Regarding location,  the parking lots nearest the most highly used buildings (residence halls, large classrooms buidlings) are in highest demand.  Among students, some live on campus while others commute so that the location-specific demand differs.
     The parking problem is not so simple as "too few spaces" nor solved by simply constructing more.  In part, the parking difficulties reflect a classic time-based "peak-load" pricing situation as is common in electricity production and distribution.  Figure 1 illustrates the problem.  Parking demand campus-wide is much higher from mid-morning to early afternoon than during other weekday times or on the weekend.  In addition, certain locations experience another demand peak in the early evening, although this is not as widesprad across campus.  As illustrated in the figure, this would imply that a higher price be charged for utilization during peak hours. 
    In addition to the time-related demand differences, it is obvious that spaces are not identical with regard to location.   Spaces that are closer to high use buildings are more valuable.  Figure 2 provides a map of WKU with parking lots color coded.  The lots with the most desirable locations are coded in orange.  To handle the parking problem solely by building more spaces would require not only large excess capacity at some times but the building of many multi-level parking structures so that they would be near the desired locations.
      Finally, cost and asthetic considerations also must be factored in.  For example, each space in a parking structure is estimated to cost aproximately $5000 to construct.  Of course, this expense should be spread (amortized) over the estimated life of the structure rather than examined as a one-time-shot.
    Because the problem has multiple dimensions, no single remedy is likely to be appropirate.  This summary does not attempt to lay out details of solutions.  Generally-speaking, the peak-load problem requires a combination of appropriate capacity, pricing, and "alternative distribution" mechanisms. 


[Please Note:  I refer to figures but do not include them for this example.  This brief is primarily analytical in character because the question asked in primarily analytical in nature -- what is the nature of the parking problem?  If the question were more empirical in nature, such as lot utilization by time of day, then facts or results of statistical investigations would play a bigger part along with tables-bigures related to them.  If the question were more about institutional features,(say the history of WKU or parking lots at WKU, then a reporting of basic historical facts and institutional features would be more appropriate with appropriate tables or figures.  A purely reporting the facts or institutions kind of summary would not have been appropriate for the example above.  Instead, the problem is briefly broken down and appropriate analytical ideas (like "peak-load" pricing and brief explanation of it) are brought in.  Also, I could have cited an article, book, or website that provides more analytical detail on the subject.  Keep in mind the audience when summarizing statistical evidence or in choosing appropriate vocabulary.]