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03TaskPerformance1 FinMar

The document contains a multiple choice exam with questions about theories of interest rates, yield curves, and credit ratings. It also contains two case analyses asking to: 1) Calculate the anticipated one-year interest rate given a two-year rate and determine the liquidity premium. 2) Calculate the interest rate a company should be charged on a loan given the risk-free rate, inflation rates, and debt margin. The responses provide step-by-step workings and calculations to arrive at the correct answers for each case analysis question.

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AilaJeanine
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269 views3 pages

03TaskPerformance1 FinMar

The document contains a multiple choice exam with questions about theories of interest rates, yield curves, and credit ratings. It also contains two case analyses asking to: 1) Calculate the anticipated one-year interest rate given a two-year rate and determine the liquidity premium. 2) Calculate the interest rate a company should be charged on a loan given the risk-free rate, inflation rates, and debt margin. The responses provide step-by-step workings and calculations to arrive at the correct answers for each case analysis question.

Uploaded by

AilaJeanine
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

BM2004

NAME: Diola, Aila Jeanine R. DATE: 11/08/21 SCORE:

I. MULTIPLE CHOICE (10 points: 10 items x 1 point)


Encircle the letter of the correct answer.

1. This theory believes that the term structure reflected in the shape of the yield curve is determined
solely by the expectations of interest rates.
a. Liquidity Preference Theory c. Pure Expectation Theory
b. Loanable Funds Theory d. Market Segmentation Theory

2. It assumes that the higher the interest rates, sectors in the market will be more willing to supply
funds; the lower the level of the interest, the less they are willing to supply.
a. Liquidity Preference Theory c. Pure Expectation Theory
b. Loanable Funds Theory d. Market Segmentation Theory

3. This theory is limited by the fact that some borrowers may have the flexibility to choose among
various maturity markets.
a. Pure Expectation Theory c. Liquidity Preference Theory
b. Market Segmentation Theory d. Preferred Habitat Theory

4. This theory assumes that investors choose securities with maturities that satisfy their forecasted
cash needs.
a. Liquidity Preference Theory c. Pure Expectation Theory
b. Preferred Habitat Theory d. Market Segmentation Theory

5. Which of the following corporation In the Philippine Dealing System (PDS) Group that offers
payment and transfer services?
a. Philippine Depositary and Trust Corp. c. Philippine Securities and Settlement Corp
b. Philippine Dealing and Exchange Corp. d. Market Segmentation Theory

6. It is the set of points of rates on a particular maturity date.


a. Term Structure c. Yield Curve
b. Real risk-free rate d. Spot Rate

7. It is the relationship between long-term and short-term interest rates for particular types of bonds.
a. Yield Curve c. Real Rate
b. Nominal rate d. Term Structure

8. It is the fixed-rate exchange for a specific market rate at a certain maturity.


a. Swap Rate c. Forward Rate
b. Spot Rate d. Real Rate

9. It is the highest rating assigned by Moody’s Investors Service.


a. Baa c. Aaa
b. A d. Aa

03 Task Performance 1 *Property of STI


Page 1 of 2
10. In 2019, Standard and Poor’s Corporation assessed the Philippines at BBB. What is the status of the
country under the given credit rating?
a. The country’s obligations are considered to be speculative and are subject to high credit risk.
b. The country exhibits adequate protection parameters; however, adverse economic
conditions may weaken the country’s capacity to meet its financial commitments in an
obligation.
c. The country is less vulnerable to nonpayment than other speculative issue; however, it faces
major economic conditions that could lead to its inadequacy in meeting its financial
commitments in an obligation.
d. The country is currently vulnerable to nonpayment and is dependent upon favorable financial
and economic conditions for it to meets its financial commitments in an obligation.

II. CASE ANALYSES (15 points: 3 items x 5 points)


Read and analyze each given case and provide what is asked. Show your complete solutions.

1. Theories in Setting Interest Rates


Migatsu Corporation wanted to borrow short-term funds from Maybank. As the Chief Financial
Officer (CFO) of the company, you wanted to know what should be the one-year interest rate of a 2%
investment if the company wanted to generate a similar return to a two-year 5% investment.
Questions:
a. What is the one-year interest rate that is anticipated in the 2 nd year?
1 year- 2% = 0.02 + 1 = 1.02
2 year- 5% = 0.05 + 1 = 1.05

(1.05)2 = 1.1025
1.1025
= 1.02 = 1.080882353
- 1
0.08088235294
x 100 %
8.088235294 %
b. Assume instead that the computed one-year anticipated interest rate
included already the effect of liquidity premium and that the two-year investment is 5.2%, what
is the amount of liquidity premium that was considered?
1 year - 2% = ti1 = 0.02
2 year - 5.2% = ti2 = 0.052
t+1r1 – 8.088235294 % = 0.08088235294

(1 + 0.052)2 = (1 + 0.02) (1 + 0.08088235294)


(1.052)2 = (1.02) (1.0808235) + x
1.1025 = 1.1099997 + x
x = 1.1099997 – 1.1025
x = 0.0074997 x 100%
x = 0.72997 %
2. Determination of Interest Rates
Tanasas Corporation plans to borrow P3,000,000 funds from Hartendorp Financing. The risk – free
rate imposed on the loan is 8%. Currently, the BSP announces a 3% inflation. In the following year,
the monetary board expects a 1.5% increase in inflation. Hartendorp still finds that the 3% debt
margin remains to be relevant. How much interest rate should Hartendorp Financing impose on
Tanasas Corporation?

Rfr = Rf – Inflation
= 8% - 3%
=5%

The real risk-free rate is 5%


Rf = Rfr + Inflation
= 5% + 4.5%
= 9.5 %

I= Rf + Dm
= 9.5% + 3%
= 12.5 %

Rubric for Grading:


CRITERIA POINTS
Complete solution with correct answer 5
Incomplete solution with correct answer 3
No solution with correct answer 1

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