Question

QUESTION TWO

A graphical plot of interest rates on government debt securities (Treasury Bills) of varying maturities can have one of three shapes; increasing, decreasing, or flat. The data below show the interest rates on the government of Ghana debt securities (Treasury Bills) on two separate dates; 31st January 2019 and 4th May 2020.

	31st January 2019	4th May 2020
91 Day T’Bill	14.65%	14.12%
182 Day T’Bill	15.10%	15.31%
364 Day T’Bill	17.38%	16.92%

Required:

i) Graph separate yield curves for the two dates. ii) On both dates, the yield curve appears to be upward sloping. What reasons would you assign for these upward sloping shapes of the yield curve in Ghana on these separate days? Your explanation should be practical and as detailed as possible but not exceeding 800 words.

Answer 1

1)

ii) When we break down the required rate on a debt security, the required rate consists of real risk-free rate, inflation premium, maturity risk premium, liquidity risk premium, default risk premium. The yield curve under normal circumstances is upward sloping. The yield curve shows the relationship between the time to maturity and the yield rate on these securities, as the maturity period increases the yield rate increases on those securities and this is known as maturity risk premium. The treasury bills do not have normally default risk premium or liquidity risk premium because they are backed by the faith of the central government and they are traded heavily so there is very little or none default risk premium as well as liquidity risk premium but they do have maturity risk premium as well as inflation risk premium. As the maturity period increase the maturity risk premium increases, the inflation risk premium may increase or decrease depending on the inflation expectation that is why these yield curves are upward sloping.