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Interest Rates and Bond Price Sensitivity

EasyStatistics & Probability00:00
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Problem

Business Context

BlueRiver Asset Management wants a quick statistical check on whether changes in market interest rates are associated with changes in the price of one of its 10-year corporate bonds. A fixed-income analyst collected monthly observations to quantify the relationship.

Problem Statement

Use the sample data to test whether monthly changes in interest rates are negatively related to monthly bond returns, and estimate the size of that relationship.

Given Data

The analyst measured monthly change in the benchmark yield (in percentage points) and the bond's monthly return (in decimal form).

MonthRate Change xxxBond Return yyy
10.10-0.008
20.20-0.015
3-0.100.009
40.30-0.022
5-0.200.018
60.05-0.004
7-0.150.013
80.25-0.019
90.000.001
10-0.050.006
110.15-0.011
12-0.250.021

Assume a simple linear model: y=β0+β1x+εy = \beta_0 + \beta_1 x + \varepsilony=β0​+β1​x+ε.

Requirements

  1. Compute the sample correlation between rate changes and bond returns.
  2. Fit the simple linear regression slope and intercept.
  3. Test H0:β1=0H_0: \beta_1 = 0H0​:β1​=0 versus H1:β1<0H_1: \beta_1 < 0H1​:β1​<0 at α=0.05\alpha = 0.05α=0.05.
  4. Report the test statistic and p-value.
  5. Interpret the estimated slope in business terms.

Assumptions

  • Monthly observations are treated as approximately independent.
  • The linear relationship is a reasonable first-order approximation.
  • Regression residuals are approximately normal for inference.