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Upon graduation from the UTS Business School, you’re now working for a superannuation fund. On your first day at work, your boss has asked you to calculate the prices of government bonds that are currently traded in the market and also to investigate the current term structure of interest rate.
(a) Based on information provided for the treasury bonds, compute the bond prices (accurate to 4 decimal places). (1 mark)
(b) Based on the current yield curve, calculate the following forward rates out of 6 months f0.5to1.0, f0.5to1.5, f0.5to2.0, ··· , f0.5to10.5, f0.5to11.0; and also the following forward rates out of 1 year f1.0to1.5, f1.0to2.0, f1.0to2.5, ··· , f1.0to10.5, f1.0to11.0; (3 marks)
(c) Plot the forward rates out of 6 months, forward rates out of 1 year and the current interest rates together on a single graph with investment horizon T on the horizontal axis. According the market expectation theory, what are investors’ expectations about future interest rates for different maturities?
