Analysis of Yield Curve and Share Prices of AMP and Qantas

Question 1
Part a
Part b
Under normal circumstances, the shape of yield curve is upward sloping. This is
because as the term to maturity increases, the credit risk increases, and hence the
expected return will be higher. Secondly, according to liquidity preference theory, as the
term to maturity increases, the opportunity risk increases, and hence the expected
return will be higher(John, Smart, Adam, & Gunasingham, 2013).
Part c
All curves were inverted initially then upward sloping. This information tells us that the
Australian economy has experienced a downturn and the expectations regarding future
inflation and short term interest rates are low.

Part d
The yield for a 2 year bond in January 2008 is 6.61%
Under Expectations theory, investors will expect an interest rate of 6.83%on a 1 year
bond in 2009
i.e (1+0.0661)^2 = (1+0.0683) *(1+1f01-09)
1f01-09 =6.383%
Month 1f2009
Jan-2009 6.383%
Feb-2009 6.524%
Mar-2009 5.580%
Apr-2009 5.461%
May-2009 5.855%
Jun-2009 6.678%
Jul-2009 6.410%
Aug-2009 5.318%
Sep-2009 5.395%
Oct-2009 4.371%
Nov-2009 4.185%
Dec-2009 3.473%
Part e
Month Expected Actual
Jan-2009 6.383% 2.69%
Feb-2009 6.524% 2.59%
Mar-2009 5.580% 2.74%

Apr-2009 5.461% 2.69%
May-2009 5.855% 2.87%
Jun-2009 6.678% 2.95%
Jul-2009 6.410% 3.00%
Aug-2009 5.318% 3.19%
Sep-2009 5.395% 3.23%
Oct-2009 4.371% 3.66%
Nov-2009 4.185% 3.73%
Dec-2009 3.473% 3.83%
We note the expected interest rates (using the expectations theory) are not equal to the
actual interest rates. The reason for this disparity is investors cannot always predict the
maturity risk premium correctly .

Part f
The Average spread was 0.64 (3 yrs), 0.68 (5 yrs) and 0.71 (10 yrs). It shows the
additional yield required to invest in NSW Treasury bonds which are more risky than
Australian government bonds, due to the Australian economy experiencing a downturn
in 2008.
3 yrs 5 yrs 10 yrs
0.41 0.57 0.50
0.59 0.76 0.67
0.74 0.80 0.73
0.64 0.65 0.61
0.54 0.58 0.54
0.52 0.54 0.51
0.65 0.65 0.64
0.62 0.61 0.63
0.73 0.70 0.69
0.68 0.65 0.63
0.79 0.87 0.75
1.10 1.15 0.90
1.12 1.14 0.85
0.88 0.91 0.95
1.05 1.14 1.29
0.79 0.88 1.07
0.61 0.69 0.90
0.55 0.59 0.81
0.48 0.42 0.63
0.41 0.37 0.55
0.31 0.40 0.54
0.33 0.41 0.53
0.35 0.43 0.58
0.39 0.45 0.62
Averag
e 0.64 0.68 0.71