1. Recently the rate on the five-year Treasury note has risen while the rates on Treasury bills have

been relatively unchanged. How would this be explained by the unbiased expectations theory?

How would it be explained by the liquidity premium theory?

2. What are core deposits? How might the interest rate hedging needs vary between a bank

relying mostly on core deposits as opposed to one relying mostly on purchased deposits?

3. From a bank management perspective, why should the possibility of early repayment be

considered differently when mortgages are fixed-rate vs. when they are adjustable-rate?

4. Why might managers have a different attitude towards what the bank's equity multiplier should

be than regulators would?

5. Beilein Bank, a US bank, has issued a one-year CD of 4 million at 2% and will fund a US loan at

5%. The spot foreign exchange rate is 1=$1.20.

a. What foreign exchange movement poses a risk for the bank?

b. If the bank can hedge using a one-year forward rate of 1=$1.18 and chooses to hedge,

what will its spread be?

c. If it wants to maintain a 3% spread on a hedged loan, what loan rate should it set?

6. What is the discount yield, bond equivalent yield, and effective annual return of a Treasury bill

with 91 days to maturity and selling at 99 percent of its face value?