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The following is a set of recent information in regards to yields to maturity- (yields) -on several types of the US and Australian government (treasuries)

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The following is a set of recent information in regards to yields to maturity- (yields) -on several types of the US and Australian government (treasuries) bonds on December 10, 2011. These yields are paired up with respect to their maturities. (a) Assuming that the US and Australian dollars are perfect substitutes and the markets for bonds and the foreign exchange are currently in equilibrium, how can you explain the apparent differences in the interest rates? Explain your answer for each maturity (b) Now assume that the covered interest parity too holds for all the maturities given below. Calculate the forward rate of exchange for each bond maturity as implied by its respective yield differentials assuming that the current spot rate of exchange (EAUsusD = 1.029). US Treasuries Australian Treasuries Yield Yield 3-Month 0.01 3.99 12-Month 0.08 3.38 5-Year 0.89 3.23

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