The table below details the term structure of interest rates for Germany as at 01 March 2016.

Maturity (T) r(1) r(2) r(3) r(4) r(5) r(6) r(7) r(8) r(9) r(10)

Spot Rate (%) -0.47 -0.56 -0.54 -0.48 -0.38 -0.33 -0.22 -0.09 0.06 0.19

A. Using the information above, Draw the shape of the German spot yield curve (does not need to be illustrated to scale). Describe the shape of the spot yield curve using the terminology covered in this unit. (Excel diagrams also fine). [5 marks]

B. Using the data in the table above, calculate the forward rate for a 3-year loan beginning in 4-years. Show all working and formulas used. [5 marks]

C. Assume that you have a normal upwards sloping yield curve. If the spot rate curve also included a liquidity premium, how would this yield curve compare to the same pure expectations yield curve without including the liquidity premium? Explain why. (A diagram may be helpful in aiding your discussion) [5 marks]

D. Explain why ratings agencies assign foreign currency and domestic currency ratings to debt ratings for sovereign debt. Explain what factors are considered when these ratings are made. [5 marks]