Q1. In 2010 and 2011, the government of Greece risked defaulting on its debt due to a severe budget crisis. Using bond market graphs, show the effect on the risk premium between U.S. Treasury debt and comparable maturity Greek debt.
Q2. Assuming that the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five years, and plot the resulting yield curves for the following paths of one-year interest rates over the next five years:
1. 5%, 7%, 7%, 7%, 7%
2. 5%, 4%, 4%, 4%, 4%
How would your yield curves change if people preferred shorter-term bonds to longer-term bonds?
Q3. Assuming that the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five years, and plot the resulting yield curves for the following paths of one-year interest rates over the next five years:
1. 5%, 6%, 7%, 6%, 5%
2. 5%, 4%, 3%, 4%, 5%
How would your yield curves change if people preferred shorter-term bonds over longer-term bonds?
Q4. The table below shows current and expected future one-year interest rates, as well as current interest rates on multiyear bonds. Use the table to calculate the liquidity premium for each multiyear bond.
|
Year
|
One-Year Bond Rate
|
Multiyear Bond Rate
|
|
1
|
2%
|
2%
|
|
2
|
3%
|
3%
|
|
3
|
4%
|
5%
|
|
4
|
6%
|
6%
|
|
5
|
7%
|
8%
|
Please make sure all answers are in Excel and all work/formulas/graphs are shown.