F2 CAPITAL MARKET YIELDS - GOVERNMENT BONDS
Per cent per annum
		Australian Federal Government						NSW Treasury
		Years to Maturity					Years to Maturity
Date	0 yrs	1 yrs	2 yrs	3 yrs	5 yrs	10 yrs	3 yrs	5 yrs	10 yrs
Jan-2007	6.25	6.26	6.18	6.11	6.05	5.88	6.33	6.28	6.17
Feb-2007	6.25	6.23	6.08	6.02	5.97	5.81	6.24	6.19	6.09
Mar-2007	6.25	6.45	6.12	6.04	5.95	5.74	6.27	6.19	6.03
Apr-2007	6.25	6.30	6.25	6.19	6.11	5.91	6.42	6.35	6.19
May-2007	6.25	6.35	6.19	6.15	6.07	5.92	6.38	6.32	6.21
Jun-2007	6.25	6.50	6.40	6.39	6.34	6.20	6.66	6.66	6.56
Jul-2007	6.25	6.57	6.38	6.38	6.30	6.15	6.68	6.71	6.62
Aug-2007	6.50	6.52	6.29	6.24	6.13	5.93	6.64	6.62	6.46
Sep-2007	6.50	6.55	6.32	6.29	6.21	5.99	6.73	6.70	6.52
Oct-2007	6.50	6.86	6.58	6.56	6.45	6.17	6.93	6.87	6.66
Nov-2007	6.75	6.83	6.67	6.57	6.36	6.03	7.15	7.01	6.66
Dec-2007	6.75	6.86	6.72	6.66	6.46	6.21	7.18	7.09	6.76
Jan-2008	6.75	6.83	6.61	6.58	6.34	6.08	6.99	6.92	6.58
Feb-2008	7.00	7.12	6.82	6.75	6.50	6.29	7.33	7.26	6.96
Mar-2008	7.25	7.03	6.30	6.21	6.10	6.09	6.94	6.90	6.82
Apr-2008	7.25	7.21	6.33	6.25	6.19	6.17	6.89	6.84	6.78
May-2008	7.25	7.35	6.60	6.47	6.33	6.36	7.02	6.91	6.89
Jun-2008	7.25	7.26	6.97	6.84	6.69	6.59	7.36	7.23	7.10
Jul-2008	7.25	6.87	6.64	6.49	6.40	6.37	7.14	7.05	7.01
Aug-2008	7.25	6.34	5.83	5.74	5.77	5.86	6.35	6.38	6.49
Sep-2008	7.00	5.63	5.51	5.48	5.54	5.65	6.21	6.24	6.33
Oct-2008	6.00	4.33	4.35	4.59	4.83	5.22	5.27	5.48	5.85
Nov-2008	5.25	3.09	3.64	3.96	4.28	4.94	4.75	5.14	5.69
Dec-2008	4.25	2.67	3.07	3.43	3.72	4.22	4.54	4.87	5.12

For questions a e, consider Australian Government Bonds only.

a. Pick the month you were born. Draw the yield curve for that month in 2007 and 2008. Also, draw the yield curve for the month falling exactly in the middle. (For instance, if you were born in April, draw the yield curves for April 2007, October 2007 and April 2008.) (Marks: 3) b. What should be the shape of the yield curve under normal circumstances? Why? (Marks: 2) c. Compare the shapes of the three yield curves that you have drawn. From the yield curves, can you infer anything about the markets expectation about the future of Australian economy? (Marks: 3) d. What is the yield on 2-year bond in January 2007? Under the expectations theory, what interest rate do investors expect on a 1-year bond next year (i.e., January 2008)? Using the same method calculate the expected interest rates on 1-year bonds for all the months of 2008. (Marks: 3) e. How do the expected interest rates compare with the actual interest rates in 2008? Do your calculations validate/not validate the expectations theory? List some possible reasons why the expectations hypothesis may not hold. (Marks: 3) For questions f g, consider both Australian Government Bonds and NSW Treasury Bonds for the period January 2007 December 2008. f. For 3, 5 and 10 year bonds what was the average spread between Australian Government Bonds and NSW Treasury bonds? Can you provide a reason for this? (Marks: 3) g. Draw a graph plotting the spread between Australian Government Bonds and NSW Treasury Bonds. Comment on the pattern of the spread. Can you provide an explanation for this pattern?