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Using the liquidity premium theory, plot the current yield curve. Make sure you label the axes on the graph and identify the four annual rates on the curve both on the axes and on the yield curve itself.
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- 8. Drawinga yield curve Given the indicated maturities listed in the following table, assume the following yields for U.S. Treasury securities: Maturity Yield (Years) (%) 1 5.5 5.0 4.7 4.4 3.8 On the following graph, use the blue points (circle symbol) to plot the yield curve implied by these interest rates. INTEREST RATE (Percent) Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically. 10 9 8 2 5 10 20 30 1 0 0 5 10 15 20 MATURITY (Years) 25 30 Yield Curve (?)If the 1rst year rate for the next 5 years is expected to be 6%, 7%,8%, 9%,10% and the preference of the investors for short term bonds mean that the liquidity fees for 1 to 5 years is:0%, 0.5%, 1%, 1.5%, 2%, calculate the interest rates that the liquidity theory predicts. Analyse the theory and design the yield curveThe table below shows current and expected future one-year interest rates, as well as current interest rates on multiyear bonds. Use the table to calculate the liquidity premium for each multiyear bond. One-Year Bond Rate 2.00% 3.00% 6.00% 7.00% 8.00% 31 = 141 = 151 = The liquidity premiums for each year are given as: (Enter your responses rounded to two decimal places.) 11 = 0% ¹21 = % 1% 1% Year 1 2 % 3 4 5 Multiyear Bond Rate 2.00% 4.00% 6.00% 9.00% 12.00%
- The graph depicts yield curves for 5 November 2021, 5 November, 2022, and 5 November, 2019. The yield rates are given for each of those in the graph (attached). a) As of 5 November 2021, what is the one-month interest rate expected by market participants in 5 January, 2020? Are they expecting a change in monetary policy within that time frame?In 1993, Bankers Trust (BT) agreed to lend money to Procter and Gamble (P&G) in return for a spread where the spread is described by equation (1). In other words, the spread represents the interest payment by P&G to BT. 98.5 * 5 yr USTyield 5.78% 30 yr UST price Spread : = ma x| 0, 100 Where 5 yr UST Yield is the yield-to-maturity of a 5- year U.S. Treasury bond; 30 yr UST price is the price of a 30-year U.S. Treasury bond. The CEO of P&G said that the spread does NOT depend on volatility of interest rates. Do you agree? Justify your answer.A business intends to use 90-day bank- accepted bill futures to hedge the interest rate risk resulting from its plans to borrow approximately $40 million using the issue of commercial paper in three months. The yield on commercial paper is currently 6.68% p.a. and the 90-day bank-accepted bill futures are currently priced at 95.35. The effective cost of funds if, in three months time the yield on commercial paper is 7.1% p.a. and the 90-day bank-accepted bill futures contract is priced at 94.10, is % p.a. (rounded to two decimal places)
- Interest rates on 4-year Treasury securities are currently 5.65%, while 6-year Treasury securities yield 7.95%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now? Calculate the yield using a geometric average. Do not round your intermediate calculations. Round your answer to two decimal places. %Which one of the following appear on the axes of the diagram used to plot the yield curve? A) Inflation on the vertical axis and time on the horizontal axisB) Yield on the horizontal axis and inflation on the vertical axis.C) Yield on the vertical axis and inflation on the horizontal axisD) Yield on the vertical axis and term to maturity on the horizontal axis E) Yield on the horizontal axis and term to maturity on the vertical axis F) Yield on the vertical axis and expected inflation on the horizontal axis.Consider a US Treasury bill with one-year maturity and face value of $1,000 that sells for $900 today. Using this information, determine the yield to maturity for this discount bond. Yield to maturity (in percent, two decimal places) = Recall, interest rates on discount bonds are often quoted in terms of yield on a discount basis. For the sake of comparison, also determine the yield on a discount basis for this bond. Yield on a discount basis (in percent, two decimal places) =
- Consider a bond without an expiration date that makes a fixed interest payment of $210 per year. Complete the following table by calculating the interest rate on the bond at different sale prices. (Hint: The effective interest rate on a bond is a ratio of the interest payment to the sale price of the bond times 100.) Price of Bond Interest Rate (Dollars) (Percent) 1,200 1,000 750 600 Use the blue points (circle symbol) and the preceding table to plot the relationship between bond prices and interest rates on the following graph. Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically. The line showing the relationship between bond prices and interest rates has a _____(POSITIVE/NEGATIVE) slope; in other words, there is _______(INVERSE / A DIRECT) relationship between bond prices and interest rates. NOTE- THIS QUESTION IS DIVIDED INTO SUBPARTS . PLEASE ANSWER…Using Treasury securities, design a trading strategy that makes a profit if the yield curve flattens, i.e., if y10 – Y2 decreases. You may use the following approximation: Y2,t = Levelt – 0.1Slopet Y10,t = Levelt + 0.4Slope: where Levelț is the level factor of the yield curve and Slope is the slope factor (so, Level and Slope are the first two principal components). Design the trading strategy such that it is immune to changes in the level of the yield curve. Further, size the trades such that for every basis point decrease in the slope factor, the strategy makes $10,000. For the quantitative calculations, you may ignore transaction and financing costs. Furthermore, you may use the following information: 2-year T-note 10-year T-bond Yield 1.6% 1.8% Modified duration 1.96 9.11Many Exchange Traded Funds (ETFs) use indexes as their underlying benchmarks, so it is equally important to understand the different types of indexes. Your ETF investing strategy depends on them. The three main types of indexes are price-weighted, value-weighted, and pure unweight. Also the capital market contains different instruction the investors can use while executing their investment. Discuss the weighting methods used in index construction with their scheme?