Question

Multiple choice question

QUESTION 8 An Repo implies that the "lender" receives a security for the time of the "loan". Since the RBA accepts only high quality securities, this makes the Repo risk-free. Despite the low risk, the RBA usually charges more than the interbank rate in order to deter banks from requesting an overnight ESF loan from the RBA. Because of the low risk, the RBA usually charges less than the interbank rate. The interbank rate is for unsecured and therefore more risky Despite the low risk, the RBA usually charges more than the interbank rate because of the long duration of overnight loans. Despite the low risk, the RBA usually charges more than the interbank rate because of the interest rate risk. QUESTION 9 You are having a conversation with your European business partner. She tells you the EUR fixed interest rate for 5 years is 1% and is shocked when you inform her that in Australia the 5-year fixed rate is 3.5%. Your 5-year estimate for the EUR inflation rate is 1% and for Australia 396. You ask your business partner if she can give you any hints how to get a mortgage in Europe to refinance your Australian house. Adding inflation to the rates they are 1%+196-2% in Europe and 3.5%+3%-6% in Australia. Therefore, you are even more shocked than your business partner You tell your business partner that the economic conditions differ and that the real interest rates are much more similar. You tell your business partner to borrow as much as possible in Europe and to use the money to buy Australian goverent bonds, which have a risk free return of some 3%.

Answer 1

Question 8:

Option B is correct because, Repo lending rate will be lower than inter-bank rate. Repo is backed by high quality securities and the credit worthiness of these issuers (who issue these high quality securities such as central or state government) will be much higher than the counter-party (borrower) itself. Whereas, the inter-bank lending is unsecured and thus has higher credit risk as compared to the securities pledged under Repo transaction.

All other options are incorrect because they mention Repo lending rate to be higher than inter-bank rate.

Question 9:

Option C is correct

Real Rate = Nominal Rate - Inflation

Thus Real Rate in Europe = 1% -1% = 0%

Real Rate in Australia = 3.5% - 3% = 0.5%

Since the time horizon is moderate i.e. 5 years and hence economic conditions can differ. Moreover, if we see, the real rate of interest in Europe and Australia are 0% and 0.5% respectively which are more or less similar.