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FIN205 Business Finance

tag 0 Download 3 Pages / 722 Words tag 31-12-2020
  • Course Code: FIN205
  • University: Charles Darwin University
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  • Country: Australia

Question:

a. Pick the month you were born. Draw the yield curve for that month in 2008 and 2009. Also, draw the yield curve for the month falling exactly in the middle. (For instance, if you were born in April, draw the yield curves for April 2008, October 2008 and April 2009.)

b. What should be the shape of the yield curve under normal circumstances? Why?

c. Compare the shapes of the three yield curves that you have drawn. From the yield curves, can you infer anything about the market’s expectation about the future of Australian economy?
 
d. What is the yield on 2-year bond in January 2008? Under the expectations theory, what interest rate do investors expect on a 1-year bond next year (i.e., January 2009)? Using the same method calculate the expected interest rates on 1-year bonds for all the months of 2009.

e. How do the expected interest rates compare with the actual interest rates in 2008? Do your calculations validate/not validate the expectations theory? List some possible reasons why the expectations hypothesis may not hold.
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