You are now an intern working with one prestigious commercial bank in Kuala Lumpur. You have been assigned by your supervisor to find the minimum interest rate that the bank you work with can charge its most credit-worthy customer. This rate is assumed to be sufficient to cover the cost of funds and the banks profit. The basis for the minimum interest rate calculations should be using the most recent five-years Malaysian Government Bonds (MGB) i.e. bonds issued by the Malaysian government. Assumed that over a period of time, the liquidity premium for MGB in case of credit worthy customers is 1.5%.

You are required to:

Obtain information on government securities (most recent T-bills and MGBs) of various maturities, plot maturities of these securities against their yields and draw a yield curve and then interpret the shape of the yield curve using:

The Pure Expectations Theory The Liquidity Premium Theory The Market Segmentation Theory Which theory do you think best describes the curve?

Malaysia 3 months bond yield 3.5096 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.0096 02-Jan-17 01-Jan-18 07-Jan-19 10-Aug-20 04-Jan-21 Interest rate Figure 1: Malaysia 3 months bond yield in past 5 years Residual maturity Interest rate 2 Jan 2017 2.950% 1 Jan 2018 3.150% 7 Jan 2019 3.320% 10 Aug 2020 2.150% 4 Jan 2021 4 1.740%. Malaysia 5 years bond yield 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 02-Jan-17 01-Jan-18 07-Jan-19 06-Jan-20 04-Jan-21 Interest rate Figure 2: Malaysia 5 years bond yield in past 5 years Residual maturity 2 Jan 2017 1 Jan 2018 7 Jan 2019 6 Jan 2020 4 Jan 2021 Interest rate 3.740% 3.540% 3.740% 3.180% 2.120% Malaysia Government Bond- Yields curve 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 3 month 7 month 5 year 1 year 3 year -Liquidity Premium interest rate Figure 3: Malaysia Government Bond yields curve Residual maturity 3 months 7 months 1 years 3 years 5 years Interest rate 1.780% 1.780% 1.780% 2.141% 2.511% Malaysia 3 months bond yield 3.5096 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.0096 02-Jan-17 01-Jan-18 07-Jan-19 10-Aug-20 04-Jan-21 Interest rate Figure 1: Malaysia 3 months bond yield in past 5 years Residual maturity Interest rate 2 Jan 2017 2.950% 1 Jan 2018 3.150% 7 Jan 2019 3.320% 10 Aug 2020 2.150% 4 Jan 2021 4 1.740%. Malaysia 5 years bond yield 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 02-Jan-17 01-Jan-18 07-Jan-19 06-Jan-20 04-Jan-21 Interest rate Figure 2: Malaysia 5 years bond yield in past 5 years Residual maturity 2 Jan 2017 1 Jan 2018 7 Jan 2019 6 Jan 2020 4 Jan 2021 Interest rate 3.740% 3.540% 3.740% 3.180% 2.120% Malaysia Government Bond- Yields curve 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 3 month 7 month 5 year 1 year 3 year -Liquidity Premium interest rate Figure 3: Malaysia Government Bond yields curve Residual maturity 3 months 7 months 1 years 3 years 5 years Interest rate 1.780% 1.780% 1.780% 2.141% 2.511%