QUESTION 1 (THE INTEREST RATES)

a) You are a senior financial analyst and have been asked to examine whether the global financial crisis and the COVID-19 affect financial and non-financial firms to the same extent? For the period beginning in 2006, plot the interest rates on three-month nonfinancial commercial paper (FRED code: CPN3M), three-month financial commercial paper (FRED code: CPF3M) and Treasury bills (FRED code: TB3MS). Compare the evolution of these interest rates.

b) Market participants, including financial institutions, fund managers and corporations, must understand monetary policy setting impacts on economic activity and business cycle. A central bank will typically implement monetary policy settings in order to achieve certain economic outcomes over a business cycle. In order to forecast future economic conditions and business activity, business managers therefore need to understand the business cycle. Briefly describe the principal monetary policy objective of the Federal Reserve and give examples of different economic indicators that may give an insight into the future stages of a business cycle.

c) Calculate the market price of each bond on 23rd April 2021 that issued by AAA Ltd., using the data provided in the table below. What is the current total value of minimum application?

Time to Maturity 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 7 Yr 10 Yr U.S. Treasury Bond Yield 0.12% 0.14% 0.20% 0.25% 0.27% 0.46% 0.67% Corporate Bonds Fact Sheet Issuer AAA Company Ltd. Issuing date 23rd April 2021 Bond 25th April 2025 expiration date Face value $ 1000 per bond. Minimum application Interest rate Coupon rate (annual) Coupon 50 Bonds ($50,000) Floating Interest Rate. The Interest Rate is the sum of the Market Rate plus the Margin. Central Government Bond Yield + 1.86% p.a. Annually (coupon payment is paid on 10th July every year) payment Market Yield 4.00%