Question 3
Investment analysts generally believe the interest rate on bonds is inversely related to the prime
interest rate for loans; that is, bonds perform well when lending rates are down and perform poorly
when interest rates are up. Can the bond rate be predicted by the prime interest rate?
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 value from the chart (right click on the line, select
“Add Trendline” and select options to show these metrics).
Bond Rate/ Prime Interest Rate
5% 16%
12 6
9 8
15 4
7 7
To answer this question, we can construct a scatter graph and fit a regression line to the data provided. Follow these steps to obtain the regression formula and the R-squared value:
1. Open a spreadsheet program like Microsoft Excel or Google Sheets.
2. Create a table with two columns: "Bond Rate" and "Prime Interest Rate."
3. Enter the given data points into the respective columns:
Bond Rate | Prime Interest Rate
------------------------------
5% | 16%
12 | 6
9 | 8
15 | 4
7 | 7
4. Highlight the data points in both columns and select the "Insert" or "Charts" option from the toolbar. Choose a scatter or scatterplot graph type.
5. After creating the scatter graph, right-click on any data point in the graph and select "Add Trendline."
6. In the trendline options, select "Linear" as the type of regression line.
7. Check the box to display the equation and R-squared value on the graph.
8. The regression formula and R-squared value will now be shown on the graph. The regression formula represents the relationship between the bond rate and prime interest rate, while the R-squared value indicates the fit of the regression line to the data.