Use the excel spread sheet to create expected interest rates for 1-year bonds for the years 2020to 2030 that are consistent with upwards sloping yield curves for the next 3 years. Upload a picture or pdf of the resulting yield curve.

Note: You only need to put in numbers in the row "Expected 1Y spot rate" and change them until the resulting yield curves have the correct shape. THINK why some numbers work and other do not. Can the expectation theory be valid if yield curves are upwards sloping for long periods of time?

100 Actual Yields for Australian Gov. Bonds. http://www.asx.com.au/asx/markets/interest Rate Security Prices.do ###***** Counce Maturity di Face value Aid Offer Last Yield High Low Number of Value Volume Valuation Status GSBA18 5.50% 21/01/2018 101.951 102.029 102.029 1 50% 102.029 101.951 2 30 395.12 298 101.951 GSAS12 3 25% 21/10/2018 100 102 84 102.958 0 1.55% D a D 0 a D 102.847 GSBE19 5.25% 15/03/2019 100 107.75 107.842 107.942 1.58% 107 842 107.75 266 107.75 GSBS 19 2.75% 21/10/2019 100 102.778 102.979 0 1.73% D a D a D 102.801 GSRG20 4.50% 15/04/2020 100 109.181 108.313 109.181 1.89% 109.181 108.181 1 5.200.86 49 108.181 GSBU20 1.75% 21/11/2020 100 99.571 99.771 99.804 1.92% 99.804 99.804 1 24.951.00 250 99.773 GSBI21 5.75% 15/05/2021 100 114.728 114.886 0 1.99% 0 0 0 0 0 114.767 GSBW121 2.00% 21/12/2021 100 99.7 99.91 99.7 2.13% 99.7 99.7 1 8.973.00 90 99.7 GSBM22 5.75% 15/07/2022 100 116.92 117.12 117.12 2.15% 117.12 117.12 1 12.297,60 105 116.971 GSBG22 5.50% 21/04/2023 100 118.614 118.907 0 2 25% D 0 D 0 D 118,672 GSBG24 2.75% 21/04.2024 100 102 697 102.973 0 0 2.39% D 0 a D a D 102.76 GSBG25 3.25% 21/04/2025 100 106.029 106.379 106.379 2.47% 106.379 106.379 1 12.446.34 106.101 GSBG26 4.25% 21:04:2026 100 114.019 114.369 2.56% D a D a D GSRG27 4.75% 21/04/2027 100 119.339 119.693 119.693 2.60% 119.693 119.693 1 12.448.07 104 119.433 GSBUZZ 2.75% 21/11/2027 100 100.97 101.41 0 2.85% 0 0 0 0 0 101.06 GSBI28 2.25% 21:05/2028 100 95.93 96.42 o 0 2.68% 0 0 0 0 0 0 96.02 GSBU28 2.75% 21/11/2028 100 100.493 100.993 0 2.70% ol 0 ol 0 0 0 100.59 GSBG29 3.25% 21/04/2029 100 105.547 106.047 0 2.74% 0 0 0 0 0 105.65 GSEGAR One 4.50% 21/04/2033 100 12002 120.44 120.44 2.97% 120.44 120.44 1 12.525.76 104 120.15 GSRK35 2.75% 21/06/2035 100 94.908 95.272 95 272 3.12% 95 272 95 272 1 1 6.954.85 73 94.974 GSBGRZ 3.75% 21:04:2037 100 104.714 109.214 109 214 3.19% 109 214 109.214 1 12 231.96 112 108.866 GSBK39 3.25% 21/08/2039 100 99.104 99.604 0 3.30% D a D a D 99 199 GSBE47 3.00% 21:02:2047 100 91.382 91.882 0 3.50% D 0 0 0 D 91.554 Pavmant E Next Ex-de Next Paym Chart 2 11/01/2018 22/01/201814 2 12/10/2017 23/10/2017 2 05/09/2017 15/19/2017 2 12/10/2017 23/10/2017 2 05/10/2017 16/10/2017 2 10/11/2017 21/11/201714 2 06/11/2017 15/11/2017 2 12/12/2017 21/12/2017 2 04/01/2018 15/01/2018 2 12/10/2017 23/10/2017 2 12/10/2017 23/10/2017 2 12/10/2017 23/10/2017 2 12/10/2017 23/10/2017 2 12/10/2017 23/10/2017 2 10/11/2017 21/11/2017 2 10/11/2017 21/11/2017 2 10/11/2017 21/11/2017 2 12/10/2017 23/10/2017 2 12/10/2017 23/10/2017 2 12/12/2017 21/12/2017 2 12/11/2017 23/10/2017 2 12/12/2017 21/12/2017 2 12.09.2017 21/09/2017 Time to Maturit in years 174.00 447.00 592.00 812.00 989.00 1209.00 1384.00 1604.00 1810.00 2090.00 2456.00 2821.00 3186.00 3551.00 3765.00 3947.00 4131.00 4282.00 5743.00 6534.00 7204.00 7995.00 10825.00 0 1 2 2 3 3 4 4 4 5 5 6 7 B 9 10 10 11 114.102 12 16 18 2D 22 SD Australian Government Bond Yields (July 2017) 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 0 1 2 2 3 2 2 3 3 4 4 5 6 7 8 9 10 10 11 11 12 16 18 20 22 30 Build your own yield curve with Expectation Theory: Change your expectation for the 1Y spot interest rates and see what happens to the yield curve 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Expected 1Y spot rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 2017 Average return till maturity 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% / / 0.00% 0.00% X=time to maturity (duration) 2 3 4 5 6 7 8 9 10 11 12 13 14 2018 Average return till maturity 0.00% 0.00% 0.00% / 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 70.00% 0.00% 0.00% X=time to maturity (duration) 2 3 4 5 6 7 8 9 10 11 12 13 1 1 2019 Average return till maturity X=time to maturity (duration) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% / 0.00% 70.00% 0.00% 0.00% 0.000.00% 2 3 4 5 6 7 8 9 10 11 12 1 Yield Curve Expectation Theory 100.00% 90.00% 80.00% 70.00% 60.00% 50.00% - 2017 - 2018 - 2019 40.00% 30.00% 20.00% 10.00% 0.00% 1 2 3 4 5 6 7 8 9 10 11 12 Build your own yield curve with Liquidity Premium Theory: Change your required risk premium for different maturities and see what happens to the yield curve x=time to maturity (duration) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Interest rate risk premium 0.00% 0.30% 0.40% 0.50% 0.60% 0.70% 0.80% 0.90% 1.00% 1.10% 1.20% 1.30% 1.40% 1.50% Required Yield fox X-year bonds 0% 0% 0% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 2% Yield Curve Liquidity Premium Theory 1.60% 1.40% 1.20% 1.00% 0.80% Average return till maturity Average retur + Risk Premium 0.60% 0.40% 0.20% 0.00% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 100 Actual Yields for Australian Gov. Bonds. http://www.asx.com.au/asx/markets/interest Rate Security Prices.do ###***** Counce Maturity di Face value Aid Offer Last Yield High Low Number of Value Volume Valuation Status GSBA18 5.50% 21/01/2018 101.951 102.029 102.029 1 50% 102.029 101.951 2 30 395.12 298 101.951 GSAS12 3 25% 21/10/2018 100 102 84 102.958 0 1.55% D a D 0 a D 102.847 GSBE19 5.25% 15/03/2019 100 107.75 107.842 107.942 1.58% 107 842 107.75 266 107.75 GSBS 19 2.75% 21/10/2019 100 102.778 102.979 0 1.73% D a D a D 102.801 GSRG20 4.50% 15/04/2020 100 109.181 108.313 109.181 1.89% 109.181 108.181 1 5.200.86 49 108.181 GSBU20 1.75% 21/11/2020 100 99.571 99.771 99.804 1.92% 99.804 99.804 1 24.951.00 250 99.773 GSBI21 5.75% 15/05/2021 100 114.728 114.886 0 1.99% 0 0 0 0 0 114.767 GSBW121 2.00% 21/12/2021 100 99.7 99.91 99.7 2.13% 99.7 99.7 1 8.973.00 90 99.7 GSBM22 5.75% 15/07/2022 100 116.92 117.12 117.12 2.15% 117.12 117.12 1 12.297,60 105 116.971 GSBG22 5.50% 21/04/2023 100 118.614 118.907 0 2 25% D 0 D 0 D 118,672 GSBG24 2.75% 21/04.2024 100 102 697 102.973 0 0 2.39% D 0 a D a D 102.76 GSBG25 3.25% 21/04/2025 100 106.029 106.379 106.379 2.47% 106.379 106.379 1 12.446.34 106.101 GSBG26 4.25% 21:04:2026 100 114.019 114.369 2.56% D a D a D GSRG27 4.75% 21/04/2027 100 119.339 119.693 119.693 2.60% 119.693 119.693 1 12.448.07 104 119.433 GSBUZZ 2.75% 21/11/2027 100 100.97 101.41 0 2.85% 0 0 0 0 0 101.06 GSBI28 2.25% 21:05/2028 100 95.93 96.42 o 0 2.68% 0 0 0 0 0 0 96.02 GSBU28 2.75% 21/11/2028 100 100.493 100.993 0 2.70% ol 0 ol 0 0 0 100.59 GSBG29 3.25% 21/04/2029 100 105.547 106.047 0 2.74% 0 0 0 0 0 105.65 GSEGAR One 4.50% 21/04/2033 100 12002 120.44 120.44 2.97% 120.44 120.44 1 12.525.76 104 120.15 GSRK35 2.75% 21/06/2035 100 94.908 95.272 95 272 3.12% 95 272 95 272 1 1 6.954.85 73 94.974 GSBGRZ 3.75% 21:04:2037 100 104.714 109.214 109 214 3.19% 109 214 109.214 1 12 231.96 112 108.866 GSBK39 3.25% 21/08/2039 100 99.104 99.604 0 3.30% D a D a D 99 199 GSBE47 3.00% 21:02:2047 100 91.382 91.882 0 3.50% D 0 0 0 D 91.554 Pavmant E Next Ex-de Next Paym Chart 2 11/01/2018 22/01/201814 2 12/10/2017 23/10/2017 2 05/09/2017 15/19/2017 2 12/10/2017 23/10/2017 2 05/10/2017 16/10/2017 2 10/11/2017 21/11/201714 2 06/11/2017 15/11/2017 2 12/12/2017 21/12/2017 2 04/01/2018 15/01/2018 2 12/10/2017 23/10/2017 2 12/10/2017 23/10/2017 2 12/10/2017 23/10/2017 2 12/10/2017 23/10/2017 2 12/10/2017 23/10/2017 2 10/11/2017 21/11/2017 2 10/11/2017 21/11/2017 2 10/11/2017 21/11/2017 2 12/10/2017 23/10/2017 2 12/10/2017 23/10/2017 2 12/12/2017 21/12/2017 2 12/11/2017 23/10/2017 2 12/12/2017 21/12/2017 2 12.09.2017 21/09/2017 Time to Maturit in years 174.00 447.00 592.00 812.00 989.00 1209.00 1384.00 1604.00 1810.00 2090.00 2456.00 2821.00 3186.00 3551.00 3765.00 3947.00 4131.00 4282.00 5743.00 6534.00 7204.00 7995.00 10825.00 0 1 2 2 3 3 4 4 4 5 5 6 7 B 9 10 10 11 114.102 12 16 18 2D 22 SD Australian Government Bond Yields (July 2017) 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 0 1 2 2 3 2 2 3 3 4 4 5 6 7 8 9 10 10 11 11 12 16 18 20 22 30 Build your own yield curve with Expectation Theory: Change your expectation for the 1Y spot interest rates and see what happens to the yield curve 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Expected 1Y spot rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 2017 Average return till maturity 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% / / 0.00% 0.00% X=time to maturity (duration) 2 3 4 5 6 7 8 9 10 11 12 13 14 2018 Average return till maturity 0.00% 0.00% 0.00% / 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 70.00% 0.00% 0.00% X=time to maturity (duration) 2 3 4 5 6 7 8 9 10 11 12 13 1 1 2019 Average return till maturity X=time to maturity (duration) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% / 0.00% 70.00% 0.00% 0.00% 0.000.00% 2 3 4 5 6 7 8 9 10 11 12 1 Yield Curve Expectation Theory 100.00% 90.00% 80.00% 70.00% 60.00% 50.00% - 2017 - 2018 - 2019 40.00% 30.00% 20.00% 10.00% 0.00% 1 2 3 4 5 6 7 8 9 10 11 12 Build your own yield curve with Liquidity Premium Theory: Change your required risk premium for different maturities and see what happens to the yield curve x=time to maturity (duration) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Interest rate risk premium 0.00% 0.30% 0.40% 0.50% 0.60% 0.70% 0.80% 0.90% 1.00% 1.10% 1.20% 1.30% 1.40% 1.50% Required Yield fox X-year bonds 0% 0% 0% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 2% Yield Curve Liquidity Premium Theory 1.60% 1.40% 1.20% 1.00% 0.80% Average return till maturity Average retur + Risk Premium 0.60% 0.40% 0.20% 0.00% 1 2 3 4 5 6 7 8 9 10 11 12 13 14