B3 An increase in the cash rate target is usually passed by Australian banks onto the interest rate of their term deposits and business loans. (a) For a given value of the yield on corporate bonds, explain in words only the likely effect of the increase in term deposits and business loans interest rates on (i) the quantity of corporate bonds that corporations want to have on issue and (ii) the quantity of corporate bonds investors want to hold in their portfolio. Your reasoning must be made expliCit. [Remember that in this course we use a stock approach to demand and supply of bonds] (2 marks) (b) In a very detailed diagram of the market for corporate bonds, represent clearly the effect of the increase of term deposits and business loans on the yield of corporate bonds at equilibrium. Clearly label your curves and points on the axes so we can distinguish easily the old and new curves, the old and new yields and quantities. (3 marks) (c) Explain in words only the mechanisms at play when the yield ofthe corporate bonds adjusts to its new equilibrium. [We will not mark your answer if you provide a diagram] (1 mark) 32 Consider the following annual rates. 0i1 = 5%, Biz = 6%, 013 = 7%, 0i4 = 8% 2i2e=3%, 3i2e = 5.5%, Assume yearly compounding. The notation follows the convention used in the course, where the rst subscript is the start of the investment and the second subscript the length of the investment. These subscripts are expressed In number of years. (a) Draw a unique timeline and indicate in different separate lines (iust below the timeline) the 6 opportunities of investments starting today implied by the interest rates listed above. ake sure that you include the relevant interest rates for each year of each investment. (1 mark) (b)Assuming expectations theory holds, calculate 0i5 . {Always use general formula with notation before plugging your numbers]. (1 mark) (c) Assuming expectations theory holds, derive the implicit expectation 2i1e embedded in the yield curve. [Always use general formula with notation before plugging your numbers]. ls expectations theory a theory that explains the formation of expectations by investors? Explain your answer. (1.5 marks) (d) With rigorous calculations, check whether expectations theory holds for 0i4. Explain your reasoning. [Always use general formula with notation before plugging your numbers]. Is there a liquidity premium? if yes, calculate its value and interpret it. If not, provide an interpretation. (2 marks) Hand write neatly the answers on a blank piece of paper with your full name and student number at the top of the page. Take a picture or several pictures if needed and convert it or them into a pdf fiie. Upload the pdf file into this question. Only one pdf file can be uploaded per question so merge your pictures ifneeded. Carefully keep your handwritten answers and your original pictures for future reference