UBFB 3033 FINANCIAL AND MONETARY SYSTEMS (JAN 2016)

UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF BUSINESS AND FINANCE

BACHELOR OF BUSINESS ADMINISTRATION (HONS) BANKING AND FINANCE

BACHELOR OF ECONOMICS (HONS) FINANCIAL ECONOMICS
BACHELOR OF BUSINESS ADMINISTRATION (HONS)
TUTORIAL 3
TOPIC 2: RISK AND TERM STRUCTURE OF INTEREST RATES
1.

Below are information of bond yield from Bloomberg terminal on May 2nd. 2008.
Three year $1000 zero coupon bond selling for $776.39.
Four year 10% coupon $1,000 par bond selling for $1,174.54.
Five year 8% coupon $1,000 par bond selling for $1,041.29.
What is the implied one year rate four years from now?

2.

If the interest rates on one to five year bonds are currently 4%, 5%, 6%, 7% and 8% and
the term premium for one to five year bonds are 0%, 0.25%, 0.35%, 0.4% and 0.5%,
predict what the one year interest rate will be in two years from now.

3.

Economists consensus had forecasted one-year Treasury bill rates for the following five
years as follows. You have liquidity premium 0.25% for the next two years and 0.50%
thereafter. Would you be willing to purchase a four-year T-bond at a 5.75% interest rate?
Year
2008
2009
2010
2011
2012

1-year rate
4.25%
5.15%
5.50%
6.25%
7.10%

4.

The one-year interest rate over the next 10 years will be 3%, 4.5%, 6%, 7.5%, 9%,
10.5%, 13%, 14.5%, 16%, 17.5%. Using the pure expectations theory, what will be the
interest rates on a 3 year bond, 6 year bond, and 9 year bond?

5.

What are the monthly payments (principal and interest) on a 15-year home mortgage for
an $180,000 loan when interest rates are fixed at 8%?

6.

What are the THREE (3) the factors that influence the shape of the yield curve. Describe
how financial market participants use the yield curve.