1.An investor wants to make atwo period investmentand is presented with the following investment options:

(a) Invest for one period at3.77% paand then for a further single period at3.57%pa

(b) Invest for two periods at3.76%pa

Select the investment option that should be chosen to maximise the return. Assume that the interest rates are compound interest rates. Round all percentage calculations to 2 decimal places.

a.investment option (b)

b.either, because both investment options will result in the same return

c.investment option (a)

The period in most forward rate calculations is taken to be one month (30 days). Use the drop down lists to select the correct interest rate definition symbol for each of the descriptions below:

A)0r2 = the two period spot rate/the implicit two period forward rate/ the rate for a 60 day investment in 30 days time

B) 1r2 = the two period spot rate/the implicit two period forward rate/ the rate for a 60 day investment in 30 days time

C) 1r3 = the two period spot rate/the implicit two period forward rate/ the rate for a 60 day investment in 30 days time

Several theories have developed over time to explain the shape of yield curves. One of the most fundamental theories is the pure expectations hypothesis.

a)Select the statement below that is a concept upheld by the pure expectations hypothesis:

A.Forward rates do not necessarily equal future spot rates for the corresponding period.

B.Expectations in the market partly affect the slope of the yield curve.

C.The shape of the yield curve is determined solely by market interest rate expectations.

D.Transaction costs are considered as part of the costs in determining the most attractive yields.

b)The pure expectations hypothesis is appropriate for securities in The pure expectations hypothesis is appropriate for securities in a liquid market/an liquid market?

3.You are a recent graduate working with a large financial consulting firm as part of their graduate program. You have spent the previous couple of weeks participating in the graduate program training seminar. For your first project you have been put onto a team working with Fantra's (a global soft drink manufacturer) financial team. As an introductory exercise, to get you warmed up, your boss has provided you with the following data and asked you to calculate the one year forward rate 2 years from now.