1. At the end of March 2021, the yield on the 10-year Treasury note (the benchmark bond in U.S.) was at its highest level since beginning of 2020. Please identify the determinants of this increase according to the Portfolio Choice Theory and explain each determinant and shift in demand/supply.
2. However, in April, the yield on the 10-year has decreased. Please read this WSJ article (https://www.wsj.com/articles/u-s-treasury-yields-fall-sharply-11618509724) and identify the reasons for this decrease (please list and explain). Do you estimate this trend to continue?
3. Your company needs to issue debt and would like to forecast the interest rate to decide whether it should obtain a fixed interest rate loan or a floating interest rate loan. You believe the following:

• The GDP has been increasing and may continue to increase
• Given the global context, you expect inflation to grow at a higher rate than the target of 2% .
• The government has announced major increases in spending.
• The overall level of savings by households is expected to increase this year.

Please answer the following questions:

(a) What is your forecast for the interest rate? (as a result of each of the factors identified above AND overall).

(b) Your company can obtain a one-year loan at a fixed rate of 8% or a loan that is currently at 8% but would be revised every month in accordance with general interest rate movements. Which loan would you recommend?

4.The spread between the US 10- and two-year yields has recently risen to the highest

level in over 5 years. Please use the Pure Expectations Theory, the Segmented Mar-

ket Theory and the Liquidity Premium Theory to interpret this.

5. Assume that interest rates for one-year securities are expected to be 0.6% today, 1.0%

one year from now and 1.5% two years from now.

(a) According to the pure expectations theory, what are the current interest rates

on two-year and three-year securities?

(b) What if the liquidity premium is 0.2% for a two-year security and 0.3% for a

three-year security?