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Forward Rate Assignment | Homework For You

Author:
June 8th, 2020
Question 1 (13 marks) a) Suppose that the current rates of T-bills with different maturities are as below:
iRi = 4.5%, R2 = 5.5%, R3 = 6.0%, R4 = 6.2%Homework For You
Using the unbiased expectations theory, calculate (i) the 1-year forward rate in year 3 and (ii) the 3-year forward rate in year 2. (4 marks)
b) Suppose we observe the following rates: R1 = 12%, R2 = 15% and E(2rı) = 16.8%. If the liquidity premium theory of the term structure of interest rates holds, calculate liquidity premium for year 2. (2 marks)
c) Suppose Hong Kong government increases the employees’ mandatory MPF contributions from 5% of their incomes to 10%. Meanwhile, she announces a cash payout of $10,000 to Hong Kong permanent residents aged 18 or above. Explain how these policies affect the interest rate of loanable fund market. (7 marks)Get Finance homework help today

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