You are researching interest rates and their forecasts. Your research provides you with the following information: 1 year rate = 6% 2 year rate = 6.125% 3 year rate = 8.5% 1 year rate, 2 years from now = 6.5% Assuming you can borrow $1 million, can you use this interest rate information to earn some risk-free profit. If yes, compute the profit. Show detailed workings. Assume that the pure expectations theory applies.

You are listening to a televised debate on one of the local news channels. The audience can ask questions from the panelists by making a phone call. The discussion is about the evolution of monetary policy in Trinidad and Tobago in the difficult times of COVID-19 pandemic. Panel members are arguing that in order to avoid a recession metamorphosing into a depression, a significant monetary policy response is required. Someone on the panel mentions that in March 2020, the Monetary Policy Committee (MPC) decided to lower not only the Repo rate to 3.50 percent but also the primary reserve requirement on commercial bank deposits was reduced to 14 percent. Another panelist chimes in to point out that the overnight interbank rate has remained unchanged at 0.50 percent, which does not seem in line with the direction of other interest rates. To support his argument, he says that the interest rates quoted by the commercial banks for lending and depositing have also been declining during the first half of 2020. Even the short term rates have declined and the 91-Day T-Bills are down to 0.96 percent. The host of the debate then flashes the 30-year TT Yield curve between December 2019 to August 2020 and the discussion takes a turn towards that direction. The yield curve is reproduced below:

While you are studying the yield curve, your phone begins to ring and the call being urgent, you decide to receive it. The T.V. goes on in the background and you hear broken bits about someone wondering at the yield curve. A lady named Judy has just phoned the T.V. panel and her question is that despite the high liquidity that may linger on till at least the medium term and that a lenient monetary policy may need to continue for some time, why is it that investors continue to attach higher risk and term premium on long-term government securities? At that moment, you step out of the room and drive off to attend to an important matter that you have been told about on the phone. Given this episode in your life on a certain day, answer the following questions: a) Why has the MPC decided to lower key rates like the Repo rate and reserve requirements? b) What might be the reason for not changing the overnight interbank rate? c) What might be the reason for a fall in lending and deposit rates by the commercial banks in Trinidad and Tobago? d) If you were on the discussion panel, what answer would you provide for Judys question? e) Why do you think Judy said that investors are attaching a higher risk and term premium on long-term government securities in spite of high liquidity?

Sophie Maddox invests in 50 shares of Spidey Comics Inc. Spideys stock offers a current dividend of $2 per share, which grows at the rate of 4% p.a. indefinitely. Sophia expects to sell her shares at the end of year 5 and requires a return of 11% on her investment. Given this information; i) Compute the current price of Spidey Inc.s shares ii) Compute the price of Spidey Inc.s shares at the end of 5 years iii) Compute Sophias overall percentage return on her investment for the 5-year period, assuming she receives dividends for time 0 through time 5 iv) Compute the growth rate in Spideys stock price v) What relationship do you observe between the stock price and growth in dividends, assuming all else remains the same.

7.0 400 09 3000 50 2000 40 100 PPIA Spread (BP) 00 20 2 1.0 Spread December 19 -August-20 -D years small 25 year 7.0 400 09 3000 50 2000 40 100 PPIA Spread (BP) 00 20 2 1.0 Spread December 19 -August-20 -D years small 25 year