Reference no: EM132388365

Assignment: Part 1: Initial post (200-250 words and you can use other's post as an exampleof your own post)

Topic:The Risk and Term Structure of Interest Rates

Part 2: reply to posts (50-75 words)

Other's post: Bond Payments Are a Test of U.S. Stance on Citgo

Write your reply:

Part 3: Answer questions: For essay questions, briefly answer each with a paragraph or two.

Each paragraph should contain a minimum of three sentences.

Yes and no answers are not acceptable.

1. What was the connection between house price movements, the growth in subprime mortgages, and securities backed by these mortgages-on the one hand-and on the other hand-the difficulties encountered by some financial institutions during the 2007-2009 financial crisis?

2. Suppose that the interest rate on one-year bonds is currently 4 percent and is expected to be 5 percent in one year and 6 percent in two years.

a) Using the expectations hypothesis, compute the yield curve for the next three years.

b) Provide a graph of the yield curve.

3. According to the liquidity premium theory, if the yield on both one-and two-year bonds are the same, would you expect the one-year yield in one-year's time to be higher, lower or the same?

Briefly explain your answer in about 50 words or more.

4. Suppose that the yield curve shows that the one-year bond yield is 3 percent, the two-year yield is 4 percent, and the three-year yield is 5 percent.

Assume that the risk premium on the one-year bond is zero, the risk premium on the two-year bond is 1 percent, and the risk premium on the three-year bond is 2 percent.

a. What are the expected one-year interest rates next year and the following year?

b. If the risk premiums were all zero, as in the Expectations Hypothesis, what would the slope of the yield curve be?

Information related to above question is enclosed below:

Attachment:- Discussion.rar