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 24 th September 2020 (Mo month, Yr Year) 24 09 2020 Time to Maturity Euro area Central Government Bond Yield Rates U S Treasury Bond Yield Rates 1 Mo 0 08 3 Mo 0 60 0 10 6 Mo 0 62 0 11 1 Yr 0 66 0 12 2 Yr 0 71 0 14 3 Yr 0 74 0 16 4 Yr 0 74 5 Yr 0 72 0 27 7 Yr 0 63 0 46 10 Yr 0 49 0 67 20 Yr 0 17 1 19 30 Yr 0 05 1 40 REQUIRED Considering both yield rates on 24 th September 2020, depict the yield curves charts and describe the implied market outlook in the Euro area and the U S market to the top management 4 marks QUESTION 1 (continued) Calculate the market price of each bond on 24 th September 2020 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 Corporate Bonds Fact Sheet Issuer North Polar Ltd Issuing date 24 th September 2020 Bond expiration date 24 th September 2025 Face value 1000 per bond Minimum application 50 Bonds ( 50,000) Interest rate Floating Interest Rate The Interest Rate is the sum of the Market Rate plus the Margin Coupon rate (annual) Central Government Bond Yield 1 86 p a Coupon payment Annually (coupon payment is paid on 10 th July every year) Market Yield 4 5 4 marks Suppose the Australian government has announced tax cuts for the business sector Using the loanable funds model, explain how this will impact the supply of and demand for loanable funds and the interest rate in Australia (Explain your answer using diagrams)

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 14, 2024

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

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 24^th September 2020 (Mo = month, Yr = Year):

24/09/2020
Time to Maturity	Euro area Central Government Bond Yield Rates	U.S. Treasury Bond Yield Rates
1 Mo	-	0.08%
3 Mo	-0.60%	0.10%
6 Mo	-0.62%	0.11%
1 Yr	-0.66%	0.12%
2 Yr	-0.71%	0.14%
3 Yr	-0.74%	0.16%
4 Yr	-0.74%	-
5 Yr	-0.72%	0.27%
7 Yr	-0.63%	0.46%
10 Yr	-0.49%	0.67%
20 Yr	-0.17%	1.19%
30 Yr	-0.05%	1.40%

REQUIRED:

Considering both yield rates on 24^th September 2020, depict the yield curves charts and describe the implied market outlook in the Euro area and the U.S. market to the top management.

[4 marks].

QUESTION 1 (continued)

Calculate the market price of each bond on 24^th September 2020 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?

Corporate Bonds Fact Sheet
Issuer	North Polar Ltd.
Issuing date	24^th September 2020
Bond expiration date	24^th September 2025
Face value	1000 per bond.
Minimum application	50 Bonds ( 50,000)
Interest rate	Floating Interest Rate. The Interest Rate is the sum of the Market Rate plus the Margin.
Coupon rate (annual)	Central Government Bond Yield + 1.86% p.a.
Coupon payment	Annually (coupon payment is paid on 10^th July every year)
Market Yield	4.5%

[4 marks]

Suppose the Australian government has announced tax cuts for the business sector. Using the loanable funds model, explain how this will impact the supply of and demand for loanable funds and the interest rate in Australia. (Explain your answer using diagrams).