QUESTION 1 (THE INTEREST RATES) You are a senior financial analyst and have been asked to analyse recent developments in the Euro era and the U.S markets and advise the top management on the economic conditions in both markets. You have collected data on the euro area yields of the central government bonds and the U.S. treasury bond yields. For this purpose, you have downloaded the following data from the European Central Bank and the U.S Federal Reserve Bank on 23rd April 2021 (Mo = month, Yr = Year): 23/04/2021 Time to Maturity 1 Mo Euro area Central Government Bond Yield U.S. Treasury Bond Yield Rates Rates 0.08% 3 Mo -0.50% 0.10% 6 Mo -0.62% 0.11% 1 Yr -0.65% 0.12% www 2 Yr -0.70% 0.14% www 3 Yr -0.74% 0.20% www 4 Yr -0.74% www 5 Yr -0.72% 0.27% www 7 Yr www 10 Yr www 20 Yr -0.63% 0.46% -0.51% 0.67% -0.17% 1.19% -0.05% 1.40% 30 Yr www REQUIRED: a) Considering both yield rates on 23rd April 2021, depict the yield curves charts and describe the implied market outlook in the Euro area and the U.S. market to the top management. QUESTION 1 (continued) [2 marks]. b) Calculate the market price of each bond on 23rd April 2021 that issued by North Polar Ltd., a European company specialises in manufacturing semiconductors, using the yield curve data provided in the table above. What is the current total value of minimum application? Issuer Issuing date Bond expiration date Face value Minimum application Interest rate Coupon rate (annual) Coupon payment Market Yield Corporate Bonds Fact Sheet North Polar Ltd. 23rd April 2021 25th April 2025 1000 per bond. 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) 4.5% [3 marks] c) Provide two examples of changes in the market for loanable funds that can result in a change in the level of interest rates. Explain how and why the interest rate changes based on the loanable fund theory. [4 marks] d) Explain how changes in interest rates are likely to affect exchange rates. [3 marks] (2+3+4+3= 12 marks) b) The following information on the performance of three funds A, B and C in Australia. Average return Standard deviation Fund (%) (%) Beta Market ?? Risk-free rate ? Fund A 19.50 10.75 0.873 Fund B 28.65 14.82 1.251 Fund C 25.70 12.33 1.005 (i) Use the data provided on Canvas to calculate the annual return of the market (ASX/S&P200). Find a proxy for the risk free rate in Australia and explain your reasoning. [2 marks] (ii) Calculate the Coefficient of variation, Sharpe and Jensen Indices of performance for these funds and interpret the results. [6 marks].