Q1. (a) Demonstrate the reasons why interest rates may differ between loans of different maturity based on expectations theory, market segmentation theory and liquidity preference theory. [9 marks]

(b) (i) Short term (one year) interest rates over the next 6 years will be 0.5%, 0.6%, 0.7%, 0.76%, 0.80% and 0.84%. Using the expectation theory, what will be the interest rates on a three-year bond? [2 marks]

(ii) Predict the one-year interest rate three years from today if interest rates are 4%, 4.5%, 4.75% and 5% for bonds with one to four years to maturity and respectively liquidity premiums are 0%, 0.1% , 0.15% and 0.2%. [3 marks]

(c) Explain THREE (3) conventional monetary policy tools that used by the Central bank of a country (preferable in Malaysia) to control the money supply and interest rates in the financial markets.

[6 marks]

(SUBJECT: FINANCIAL MARKETS & INSTITUITIONS)