INVESTMENT MANAGEMENT UMAD5X

Bonds 2 Workshop
1. The yield curve is upward sloping. Can you conclude that investors expect short-
term interest rates to rise? Why or why not?

2. The yield to maturity on one year zero coupon bonds is 7.5%. The yield to
maturity on two year zero coupon bonds is 8.5%.

a. What is the forward rate of interest for the second year?

b. If you believe in the expectations hypothesis, what is your best guess as to the
expected value of the short-term interest rate next year?

c. If you believe in the liquidity preference theory, is your best guess as to next
year’s short-term interest rate higher or lower than in (b)?
2012 June Exam Question 6

a) The graph below depicts the yields on 3 month LIBOR and T-bills. Explain why is
one always on top of the other? What happen to the spread around 2008? (5 marks)

7
6
09/08/2007
5
4
3
15/09/2008
2
1
0
01/02/02

01/08/02

01/02/04

01/08/04

01/02/06

01/08/06

01/02/08

01/08/08

01/08/09
01/08/01

01/02/03

01/08/03

01/02/05

01/08/05

01/02/07

01/08/07

01/02/09

b) Given the information provided in the table below, what is the spread between
the 10 year bond yields between that of Germany and Greece? (13 marks)

Coupon rate Current Price Par Value

Greece 6.00% 24.00 100.00
Germany 2.00% 100.00 100.00