Question

In: Economics

Question 1: April 23rd, 2011 issue of the Economist reports 1 year Treasury yields in the...

Question 1: April 23rd, 2011 issue of the Economist reports 1 year Treasury yields in the US and Turkey as 0.28% and 6.25% respectively.

a. Why do you think the interest rates are so high in Turkey as compared to the US?

b. Based on the reported interest rates, what would be the 1 year forecast of Turkish Lira. (Assume that current spot rate is USD/TRY 1.5300). Can the interest rate differentials explain the change in the exchange rate?

Solutions

Expert Solution

Why do you think the interest rates are so high in Turkey as compared to the US

1) The rates of interest rates are so high in Turkey in comparison to US because Turkey is expecting a high rate of inflation. The International Fisher Effect states that a high treasury yield in one nation (in the given case it is Turkey) in comparison to another nations (in the given case it is U.S.) depicts that Turkey is expecting a high rate of inflation

2) One year forward rate (United States dollar / Turkey Yen = Spot rate * (1 + United States treasury rate) / (1 + Turkey treasury rate)

= 1.53 * (1+0.28%) / (1+6.25%)

= 1.44

Devaluation in Percentage = (One-year forward rate - Spot rate) / spot rate

= (1.44 - 1.53) / 1.53

= -5.62%

The change in the rate of exchange is related to rate of interest differentials. According to International Fisher Effect the expected change in the current exchange rate among any two currencies is nearly equivalent to the difference between the two nation's nominal rates of interest for that time

Rahul Sunny answered 1 year ago
Next > < Previous

Related Solutions

A 5-year Treasury bond has a 3.7% yield. A 10-year Treasury bond yields 7%, and a...
A 5-year Treasury bond has a 3.7% yield. A 10-year Treasury bond yields 7%, and a 10-year corporate bond yields 8.5%. The market expects that inflation will average 3% over the next 10 years (IP10 = 3%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities:...
A 5-year Treasury bond has a 4.8% yield. A 10-year Treasury bond yields 6.95%, and a...
A 5-year Treasury bond has a 4.8% yield. A 10-year Treasury bond yields 6.95%, and a 10-year corporate bond yields 9%. The market expects that inflation will average 2.55% over the next 10 years (IP10 = 2.55%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities:...
A 5-year Treasury bond has a 4.7% yield. A 10-year Treasury bond yields 6.15%, and a...
A 5-year Treasury bond has a 4.7% yield. A 10-year Treasury bond yields 6.15%, and a 10-year corporate bond yields 8.05%. The market expects that inflation will average 2.25% over the next 10 years (IP10 = 2.25%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities:...
Question 2: One year US and Brazilian Treasury yields are 4.5% and 9.5% respectively. Current spot...
Question 2: One year US and Brazilian Treasury yields are 4.5% and 9.5% respectively. Current spot rate is USD/BRL 2.9580. If the US real interest rates are 2.00%, a. What should be 1 year IFE forecast of USD/BRL future spot rate? b. What should be the expected inflation in Brazil for the year ahead if IFE holds? [Use exact formula, not approximation]
This question is related to treasury bonds’ term structure. a. “A term structure of bond yields...
This question is related to treasury bonds’ term structure. a. “A term structure of bond yields tells us how bond yields change over time.” Explain whether you agree or disagree with the statement. b. When you observe a down-sloping yield curve, what may you say about the economy under the liquidity premium theory?
All Treasury yields are at 1%. I long a 30-yr treasury bond, coupon rate = 5%....
All Treasury yields are at 1%. I long a 30-yr treasury bond, coupon rate = 5%. If yield increases by 2%, calculate the dollar change in value using the modified duration, and the change is called delta p1. Calculate the exact dollar change by the exact new price - the original price, and the change is called delta p2. What is delta p1 - delta p2? (Should be in units of dollars)
The following table summarizes the yields to maturity on several​ three-year bonds: Security Yield ​(%) Treasury...
The following table summarizes the yields to maturity on several​ three-year bonds: Security Yield ​(%) Treasury 2.15 AAA corporate 3.25 BBB corporate 4.25 B corporate 5.69 What is the credit default spread on​ B-rated corporate​ bonds? 1.0% 1.10% 2.15% 3.54% 5.69%
a. Suppose a 7.2% semi-annual coupon 20-year Treasury issue with a par value of $100 issue...
a. Suppose a 7.2% semi-annual coupon 20-year Treasury issue with a par value of $100 issue is priced in the market based on the on-the-run 20-year Treasury yield. Assume further that this yield is 5.60%, so that each cash flow is discounted at 5.60% divided by 2. What is the market price of the Treasury issue based on this assumption? b. Suppose also that the price of the same Treasury issue would be $115.285 if it is calculated based on...
a. Suppose a 7.2% semi-annual coupon 20-year Treasury issue with a par value of $100 issue...
a. Suppose a 7.2% semi-annual coupon 20-year Treasury issue with a par value of $100 issue is priced in the market based on the on-the-run 20-year Treasury yield. Assume further that this yield is 5.60%, so that each cash flow is discounted at 5.60% divided by 2. What is the market price of the Treasury issue based on this assumption? b. Suppose also that the price of the same Treasury issue would be $115.285 if it is calculated based on...
•Note the following yields: 10 year treasury 2.37%, 10 year AAA rated bond credit spread 0.90%...
•Note the following yields: 10 year treasury 2.37%, 10 year AAA rated bond credit spread 0.90% (90 basis points), BBB rated bond credit spread 1.20% (120 basis points). What is the price of a 10 year bond, $1000 par value, with a coupon rate of 6% that pays interest semi-annually and has risk similar to a BBB rated corporate bond? •Suppose Company X has earnings next year of $1.00 and grows earnings by 40% for 2 years and will grow...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT