Since the outbreak of the Covid-19 pandemic in March 2020, the U.S. experienced turbulent economy. The...

Transcribed Image Text:

Since the outbreak of the Covid-19 pandemic in March 2020, the U.S. experienced turbulent economy. The chart below shows the daily U.S. Treasury yield curves on January 2nd 2020, January 4th 2021 and February 28th 2022. Interest rate (%) 2.5 1.5 0.5 0 The U.S. daily treasury par yield curve rates 1 Mo 2 Mo 3 Mo 6 Mo 1Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr 02 January 2020 04 January 2021 28 February 2022 a) Describe the determinants of interest rate in the context of risk structure of interest rate and term structure of interest rate. [10 marks] b) Given the U.S. yield curve on January 2nd 2020, January 4th 2021 and February 28th 2022 as shown in the above chart, using appropriate theories to predict the market expectation of short-term interest rate and economy in the near term in the US Explain your prediction theoretically. [10 marks] c) Information extracted from bond markets and stock markets might have predictive power on a country's economic performance and market risk in the near term. Enumerate three predictors of economic performance from bond marks and two predictors of market risk from stock markets. Using relevant theories to explain why these market-implied information can have such a predictive power. [10 marks] Since the outbreak of the Covid-19 pandemic in March 2020, the U.S. experienced turbulent economy. The chart below shows the daily U.S. Treasury yield curves on January 2nd 2020, January 4th 2021 and February 28th 2022. Interest rate (%) 2.5 1.5 0.5 0 The U.S. daily treasury par yield curve rates 1 Mo 2 Mo 3 Mo 6 Mo 1Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr 02 January 2020 04 January 2021 28 February 2022 a) Describe the determinants of interest rate in the context of risk structure of interest rate and term structure of interest rate. [10 marks] b) Given the U.S. yield curve on January 2nd 2020, January 4th 2021 and February 28th 2022 as shown in the above chart, using appropriate theories to predict the market expectation of short-term interest rate and economy in the near term in the US Explain your prediction theoretically. [10 marks] c) Information extracted from bond markets and stock markets might have predictive power on a country's economic performance and market risk in the near term. Enumerate three predictors of economic performance from bond marks and two predictors of market risk from stock markets. Using relevant theories to explain why these market-implied information can have such a predictive power. [10 marks]

Answer rating: 100% (QA)

a The determinants of interest rate are risk structure of interest rate and term structure of interest rate The risk structure of interest rate refers ... View the full answer