Investment analysts generally believe the interest rate on bonds is related to the prime interest rate...

Investment analysts generally believe the interest rate on bonds is related to the prime interest rate for loans.

Use the following data to construct a scatter graph and then fit a regression line to the data. Report the regression formula and the r-squared values from the chart (right click on the data points, select Add Trendline, and select options to show these metrics).
Do you think the bond rate can be predicted by the prime interest rate? Justify your answer using the relevant metrics.

Prime interest rate	Bond rate
5.00%	28.00%
12.00%	48.00%
9.00%	32.00%
1.50%	4.00%
0.40%	7.00%
11.00%	36.00%
6.00%	28.00%
2.00%	10.50%

Solutions

Expert Solution

Question (a)

The scatter plot with regression formula and the r-squared values is as follows

Question (b)

The R² value here is 0.9184

The value of correlation coefficient r =

= 0.9588

Here number of observation,n = 8

Degress of freedom = n - 2

= 6

Significance level = 0.05 by default

The crtical r-value for 6 degrees of freedom and value of 0.05 = 0.707 from the below attached table

Since the correlation coefficient r value of 0.9588 is more than the critical r-value of 0.707, the bond rate can be predicted by the prime interest rate

orchestra answered 1 year ago

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