Forecast future inflation and business cycles

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Reference no: EM132006163

Roger, who is a customer of Alliance Bank of Arouba, approaches the Bank Manager and asks if the Bank would be willing to commit to making a one-year loan to him at an interest rate of 7.95% one year from now. To compensate for the costs of making the loan, the bank needs to charge two percentage points more than the expected interest rate on a Belize bond with the same maturity if it is to make a profit. The Bank Manager estimates the liquidity premium to be 0.55%. The one-year Arouba bond rate is 6% and the two-year bond rate is 6.5%? a. Should the Bank Manager be willing to make the 1-year loan commitment to Roger? b. Explain and demonstrate, using graphical examples, how yield curves can be used to help forecast future inflation and business cycles.

Reference no: EM132006163

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