Name: Delgado,Cresilda Q.

Date submitted: 12/10/2020

Time and schedule: 12:30- 1:30PM Score:

1. Identify and explain the determinants of Market Interest Rates?

This are the determinants of Market Interests Rates . Real Risk-Free Rate
of Interest. The rate of interest that would exist on default-free U.S. Treasury securities if no
inflation were
expected. Nominal (Quoted)Risk-Free Rate, rRF The rate of interest on a security that is free of
all risk . Inflation Premium a premium equal to expected inflation that investors add to the real
risk-free rate of return. Default risk premium the difference between the interest rates. Liquidity
premium a premium added to the equilibrium interest rate on a security. Interest Rate Riks it is
the risk of capital losses. Maturity Risk Premium a premium that reflects interest rate risk.

2. In your point of view, how do you classify the link between expected inflation and interest
rates? Elaborate further.

Inflation and interest rates are often linked and frequently referenced in macroeconomics.
Inflation refers to the rate at which prices for goods and services rise. There is a general tendency
for interest rates and the rate of inflation to have an inverse relationship. When interest rates
are low, the economy grows and inflation increases and when interest rates are high, the
economy slows and inflation decreases.

3. Identify and explain the different Macroeconomic factor that influences interest rates.

Macroeconomics factors have an important effect on both the general level of interest rates and
the shape of the yield curve, so the primary factors are Federal Reserve Policy which controls
the quantity of money in the economy and the Fed's conducting monetary policy is to maximize
employment, stabilize price and moderare long-term interest rates. Federal Budget Deficits or
Surplus this will be the result of increased inflation, which will also increase interest rates. The
larger of federal deficits ,the higher level of interest rates. International Factors this means that
they are more likely to imports than exports. Business Activity which you can examine how
business condition influence interest rates.
4. What is a Bond? Identify and explain its key characteristics.

Bond is a long-term contract under which a borrower agrees to make payments

of interest and principal on specific dates to the holders of the bond. It issued by corporations
and government agencies that are looking for long-term
debt capital. Bonds are grouped in several ways. Treasury bonds issued by the federal
government and sometimes referred as government bonds. Corporate bonds , bonds that issues
by the corporations and it is a debt issued by a company in order to raise capital. Municipal bonds
, bonds that issued by state and local governmennts and this bonds are exempt from federal
taxes and most state and local taxes. Foreign bonds, bonds that issues by foreign governments
or by foreign corporations.

5. What are the risks associated in a Bond? Explain further.

The risk associated in a Bond. Interest Rate Risk it is the risk of a decline in a bond price due to
an increase in rates. Reinvestment Rate Risk it is the risk that a decline interest rates and lead to
decline income from a bond portfolio.