What is the definition of indirect investment?

- investing in a fund or a trust
- indirect investing means you invest in something else which itself invests directly in shares, bonds, cash, property or FOREX
- buying units or shares in a fund is an indirect investment

Define the terms bonds and maturity.

How does risk affect the rate of interest on loans?

How do long- and short-term loans differ regarding level of risk?

What are all interest rates based on?

- “bonds” can be used to mean all fixed-interest investments (except for short-term ones)
- “maturity” means the repayment date: a loan matures regardless if it is a bank loan or a bond
- bonds are a more liquid form of debt than bank loans and overdrafts because they are tradeable
- the riskier the borrower is, the higher the interest rate the lender will charge
- the longer into the future the maturity date is, the higher the interest rate will be because the more time there is between borrowing and repayment and the greater the possibility of something going wrong
- a long-term loan is riskier than a short-term loan and therefore has a higher interest rate
- all interest rates are based on the cash rate: the overnight rate for banks lending each other money overnight, including to the central bank

How do we calculate the real cash rate?

- the real rates of anything are nominal rates adjusted by the rate of inflation:

(1 + *R* nom / 1 + *H*) - 1 x 100

- remember to convert percentage rates into decimals

What is this graph showing?

Describe it.

- this graph is showing the nominal rates over 20 years in the blue and the corresponding real rates (after accounting for inflation) in the red
- not only are the real rates below the nominal rates, but they have greater amplitudes (more volatile)
- the ups and downs of inflation do not smooth out the ups and downs of the nominal rate, they reinforce them

We do not need to learn the list of authorised deposit-taking institutions (ADIs).

Authorised deposit-taking institutions (ADIs) in Australia include:

- banks
- credit unions
- non-bank financial institutions (NBFIs)
- hedge funds
- money lenders (if they can get a licence)

How is the money market divided from the capital market?

- the money market is divided from the capital market by the one year fence
- just like current assets are divided from non-current assets by the one year fence in accounts

Describe commercial bills, corporate bonds/debentures and unsecured notes.

- international shipping and freight companies use
**commercial bills**(bills of exchange) as forms of credit (part of current assets) to finance international trade - a cheque is a form of a bill of exchange: you pay the invoice (draw the cheque on your bank) to the payee
- in financing trade, the person receiving the goods draws some exchange on their bank in favour of the payee
- it is like a deferred cheque because the supplier only gets the cash from the cheque when the customer certifies that the goods have been safely received
- even though commercial bills are part of current assets, they are strictly for financing trade itself and are not stores of wealth
**corporate bonds/debentures**are longer-term loans (the buyer of the bond is the lender to the issuing corporation)- the lender can get rid of credit risk by selling the bond on
**unsecured notes**are bonds/debentures not secured by any collateral/deposit/guarantee (like an unsecured bank loan)- any kind of unsecured loan is riskier than a secured loan and, so, carries a higher interest rate

How are fixed-interest securities/bonds rated?

- the textbook says that credit rating is between AAA and BBB
- any bond not good enough to get BBB is a junk bond
- speculators, day traders and aggressive investors like to play with junk bonds because they offer a higher interest rate
- the ratings are subjective: credit ratings agencies look at a company’s solvency, balance sheet and profit > credit rating
- during the GFC, credit ratings agencies were rating junk bonds as non junk bonds (and got away with it - no fines/jail terms)
- given the history, credit ratings agencies cannot be relied upon

Differentiate between the primary and the secondary market.

- firms issue new bonds/shares into the primary market
- holders of bonds/shares sell them into the secondary market
- same place!

primary market = new bond/share

secondary market = trading an existing bond/share

How does a discount security pay its interest?

- discount securities don’t pay explicit interest, but rather implicit interest
- usually short-term and you receive interest by buying the bond at a discount

e. g. 1 year $1,000 bond and we pay $880 = discount rate of (120/1,000) x 100 = 12%

How do we calculate the yield ratio?

When the bond price goes up, the yield goes down. Why?

- because bonds can be traded, they’re in a market
- where there’s a market, prices can go up or down
- when we’re in the secondary market for bonds, we’re not interested in the rate, just the potential capital gain and the yield
- yield ratio = interest rate / current market price
- if a $1,000 bond has a nominal interest (coupon) rate of 5% and can be bought for $500, then the 5% becomes a 10% yield
- the interest rate is only needed to calculate the yield
- the stated interest rate is always the nominal interest rate
- because the yield is a ratio, it can be just as affected by the denominator as the numerator
- the numerator of the yield doesn’t change because interest is fixed
- the denominator, however, changes daily
- every time the bond price changes, the yield changes in the OPPOSITE direction
- bond price up, yield down, why?
- because the interest itself doesn’t change, just what you’re dividing it by

How do we gain wealth through investing in shares?

What does dividend imputation mean?

- historically, shares offer the highest returns of all direct investments
- strong capital growth means that the share price has gone up
- regular income = regular dividends
- dividend imputation means that you don’t have to pay income tax on your dividend
- this is because dividends are paid out of after-tax profits
- but you still have to declare dividends on your tax return in case individual circumstances prevent tax exemption

Why have the S&P 500 shares risen the most?

What does limited liability on shares mean?

- limited liability on shares means that if a company goes bankrupt, the shareholders can’t be asked to pay more than a fully paid-up share
- limited liability is more important to an investor for small, private companies than for large, public ones

On the stock market, what is the main driver of market forces?

- share prices are determined by supply & demand, but not like other markets!
- because the supply of shares and bonds is limited, the demand varies a lot
- on the stock market, prices are more affected by changes in demand than by changes in supply
- changes in demand are instant, changes in supply are not > demand is the important driver of market forces
- in the long-run (5 years +), over 90% of the value of a share depends on the underlying performance of the firm: long-term movement of stock prices reflects the long-term performance
- therefore, analysing the fundamentals of the firm is the single best guide to assess how the firm’s stock price is going to perform

What are Australian share prices influenced by?

- Australian shares are no more influenced by international capital flows than in Hong Kong or London
- mainly influenced by COMMODITIES
- Australia is a source of metals
- Australia is led by how well commodities do
- like London and Hong Kong, Australian shares follows the New York stock market (dominant)

What does this graph tell us?

Why do investors in Australia like the banks?

resources = commodities

financials = banks/hedge funds

- both commodities & financials doing well
- if the banks can be rescued when they’ve committed crimes and nobody goes to jail, then they’re pretty safe
- not so much downside risk with a bank doing badly and the prospects of sharing in its big profits when it does well is relatively greater (a GFC consequence)

Differentiate between fundamental and technical analysis.

**fundamental analysis**is looking at the real facts about the company’s economic circumstances: its competitive position, previous performance, liquidity, capital structure, market valuation & risk analysis- apply fundamental analysis to decide whether to buy, hold or sell shares
- works in all weak-form efficient and inefficient markets
**technical analysis**is the analysis of the PRICE itself over time- there are patterns in share & bond prices on the stock market that
**do**predict changes - studying price patterns in an inefficient or weak-form efficient market does pay off
- textbooks assume all markets are strong-form efficient = perfect market = no inside information
- to emulate a perfect market, the legislation makes insider information illegal, but not always implemented
- only the top 5 securities in Australia are semi-strong, e.g. BHP

How do we reduce alpha risk in a perfect market? And in the real world?

- in the context of investment, the only risk that gets measured is the variability of returns: variability = risk
- market risk = beta risk
- company-specific risk = alpha risk
- cannot diversify market (beta) risk
- the more efficient a market is, the less it will reward investors taking on alpha risk because alpha risk should be reduced solely through diversification
- this means that we should seek out investments with a maximum negative correlation with each other to minimise alpha risk
- weak-form efficient markets, however, DO reward alpha risk
- diversification, therefore, reduces but does not eliminate alpha risk in the real world

What does this diagram show us?

- in theory, the more shares you have in the portfolio, the less alpha risk you should have

Why are we not taught technical analysis in class?

- because technical analysis does not work in semi-strong form efficient markets

When you’re buying a share, what does it mean if you’re buying at ‘limit’?

- when you’re buying a share, you either buy it at market price or at ‘limit’ (up or down)
- pre-specified to the broker: “Don’t buy until the price rises to/falls to …)

What is CAPM and what does the model hold?

- the CAPM is a central piece of dogma in modern finance and financial theory
- most traders, hedge fund managers, stockbrokers and finance professors believe in CAPM as gospel
- need strong-form efficient markets for CAPM to work properly
- CAPM holds that the expected return of a security (or a portfolio of securities) = the rate on a risk-free security + a risk premium

Describe the CAPM formula shown.

overall return = return on the risk-free rate + beta x the risk premium (*R _{m} - R_{f}*)

where,

- R
_{m}* = market portfolio rate - R
_{f}* = risk-free rate

Describe this diagram.

- beta is a measure of (market) risk
- the variability of the return on a security that correlates directly with the whole of the rest of the market
- under the CAPM there is such a thing as a risk-free investment and what you get back under a strong-form efficient market is a function of how much systematic (market) risk you take on

What does a high/low price-earnings ratio indicate?

- the main ratio for evaluating a share is the price-earnings ratio = share price / earnings per share
- big P/Es mean big market confidence
- small P/Es can mean a big bargain, especially in an inefficient market (undervalued)
- relative to the average for any one market sector, very low or very high P/Es are signals to buy or sell

What does a low PEG ratio indicate?

- a low PEG ratio means undervaluation

What’s the difference between a growth and a value investment regarding the P/E and yield?

- need to understand the difference between a growth investment and a value investment
- a growth investment has a high P/E and related low yields and, therefore, have the potential for high future growth
- a value investment has a low P/E and, therefore, relatively high earnings (high dividend yields) and may be a good buy
- if buying for retirement, opt for the value investment because it will give more income per year
- if aiming to get as big a capital as possible, opt for the growth investment because it has more potential for the share price to rise

Discuss these alternative direct investment options.

- can directly invest in all listed alternatives except for infrastructure (unless you are the local council)
- you can directly invest in property trusts, but then you are indirectly investing in the underlying properties
- private equity means buying shares in a firm that does not have a stock exchange quotation (it is private relative to being public/quoted)
- many hedge funds issue shares that allow you to share in an aggressive investment strategy

Discuss these alternative direct investments.

- metals are very variable but relatively predictable in the short-term (< year)
- buying commodities like copper, silver or gold generally means that you are buying a paper title
- collectibles: old records, works of art - need to assess how tradeable they are, e.g. stamp collections are the most liquid collectible (not a short-term investment)
- agricultural schemes require fundamental analysis
- forex: day-trading/short-term trading - avoid unless you do at least 3 months shadow investing, e.g. to understand what causes one currency to rise against another

What are ethical investments?

- ethical investments are those where social responsible and environmentally responsible behaviour is rewarded by the investors

For the exam, be sure to understand:

Be sure to understand:

- efficient market levels
- the difference between a value and a growth investment
- what a yield is
- capital asset pricing model says that the market does NOT reward company-specific risk because you should be diversifying out of it (but in the real world, you can only do that to a limited extent)

What does the inverse yield curve represent?

*Page 165 of the textbook*

- An inverse yield curve represents a period of time when short term interest rates are higher than long term rates.
- It may be an inflationary period when interest rates rise in the short term to reduce the inflationary pressures in the economy.

Why do corporate bonds rated as BBB yield higher returns than corporate bonds with a AAA rating?

*Page 167 of textbook*

Bonds with a BBB rating are assessed to be a higher risk than bonds with a AAA rating and hence will yield a higher rate of return.

What is the likely effect of the general prices of shares of an announcement by the RBA of a decrease in the cash rate?

*See page 187-188 for how the expected dividend per share affects share prices**To answer this question you need to know about shares and the share market from pages 172 to 194 of the textbook**You will note on page 177 that the factors that affect share prices are many and include interest rates**The various share classes are covered on pages 174-175*

All else being equal, the likely effect of an announcement by the RBA of a decrease in the cash rate will be an immediate change in expectations. The share market operates on information so the announcement alone is sufficient to change estimated values. Share investors derive a fair market value for company shares based upon expected future cash flows and the capital costs incurred by the company to fund them. Lower interest rates should lead to lower funding and operating costs, thereby raising the free cash flows the company is able to generate. In turn, being a residual claimant, the share investor is entitled to receive the increased free cash flows and therefore the price of buying a share of these higher cash flows will also be higher.

You will note that ordinary shareholders are entitled to dividends and return of capital (in case of liquidation) only after preference shareholders have been paid all amounts due to them. This means ordinary shareholders are residual claimants to dividends and return of capital.

A reduction in the cash rate will reduce interest rates and consequently borrowing costs incurred by companies. All things being equal, that is, if everything else is held constant, then lower borrowing costs will increase company profits. Since preference shareholders are usually paid a fixed amount of dividends, the residual profits from lower borrowing costs following the reduction in the cash rate are likely to increase dividends paid to ordinary shareholders. If this happens the share price will increase.

Provide a reason why an investor might buy shares that are selling on a very high P/E ratio.

*Page 191 of the textbook*

- Some people like to ‘go with the herd’ and buy shares which have enjoyed increasing prices in the recent past.
- Increasing prices drive up the P/E ratio if the underlying earnings are not growing as fast.
- The rationale for buying these shares is that the price will continue to rise or that earnings will eventually catch up and the P/E will fall towards market values.

Assume that you invest $75 000 in a 1-year term deposit at 6.5%. How much is repaid to you at maturity?

If inflation is 2.75%, what is your real gain in today’s prices?

$75,000 x 0.065 = $9,875 interest plus the $75,000 principal = total repayment of

$79 875 in 1 year’s time

But, when inflation is factored in:

Nominal – Inflation = 6.5 – 2.75 = 3.75%

The real rate of return is then 3.75% or $2,812.50

A 90-day $100 000 BAB (Commercial Bill) security yields 6.6%. Calculate its price.

*Pages 169 – 170 of textbook*

Price = 100 000/1 + (90/365 x 0.066) = $98 399 (rounded)

CAPM says: (nominate the incorrect statement):

Select one:

a. if investors wish to buy a particular share, the expected return must, at least, be equal to the return they would earn if they invested in a risk-free asset.

b. investors need to be compensated for taking risk, they will not be compensated for total risk, just the unsystematic risk.

c. beta and the risk premium multiplied together, plus the risk-free rate, provide the expected return of the share.

d. the expected return on a share is equal to the risk-free rate plus the amount of beta multiplied by the risk premium.

**b.** investors need to be compensated for taking risk, they will not be compensated for total risk, just the unsystematic risk.

Contributing ordinary shares:

Select one:

a. are shares issued on the understanding that dividends will not be payable until a future specified date when a particular project becomes profitable.

b. may be cumulative, participating or redeemable.

c. are completely paid up when initially issued.

d. are not completely paid up when initially issued.

**d.** are not completely paid up when initially issued.

Contributing shares are not completely paid up when initially issued.

(Learning objective 5.5 ~ understand the nature of and participants in the share market)

The effect of a change in the general level of interest rates on the capital values of traded fixed-interest securities is such that:

Select one:

a. a fall in the general level of interest rates will normally promote decreases in the capital values of traded fixed-interest securities.

b. holders of these securities will enjoy an appreciation in capital values when the general level of interest rates falls.

c. there is a positive relationship between the general level of interest rates and the capital values of traded fixed-interest securities.

d. both a and c.

**b.** holders of these securities will enjoy an appreciation in capital values when the general level of interest rates falls.

Holders of traded fixed-interest securities will enjoy an appreciation in capital values when the general level of interest rates fall. This is consistent with the inverse relationship between prices and interest rate movements.

(Learning objective 5.4 ~ appreciate the difference between discount and coupon securities and the effect of a change in interest rates)

In terms of discount securities nominate the incorrect statement:

Select one:

a. Instruments such as BABs are discount securities in that their selling prices are less than (at a discount to) their face values.

b. The face value of the security is sold at a discount so that the amount paid on maturity is equal to the face value of the security.

c. Pays a coupon or interest payment monthly until maturity.

d. All of the above.

**c.** Pays a coupon or interest payment monthly until maturity.

Discount securities do not make coupon payments as all interest is compounded and paid to the investor at maturity.

(Learning objective 5.3 ~ understand the different forms of direct fixed-interest investments)

Market forces are the primary determinant of share prices in the secondary market with prices increasing arising from:

Select one:

a. excess levels of buying pressure over selling pressure.

b. excess levels of selling pressure over buying pressure.

c. equilibrium levels of buying and selling pressure.

d. either b or c.

**a.** excess levels of buying pressure over selling pressure.

Share prices will increase arising from excess levels of buying pressure (demand) over selling pressure (supply).

(Learning objective 5.6 ~ consider the influences on share prices)

Characteristics of preference shares include:

Select one:

a. cumulative shareholders retaining priority over profits until all outstanding dividends have been paid.

b. participating shareholders having priority for dividends and have potential access to additional dividends after ordinary shareholders have been paid.

c. redeemable shareholders having their shares bought back or redeemed at their face value at the discretion of the company at a certain date.

d. all the above.

**d.** all the above.

Characteristics of the various types of preference shares differ. Ordinary preference shareholders have a claim only on profits for a particular year. Cumulative shareholders retain priority over profits until all outstanding dividends have been paid. Participating shareholders have priority for dividends and have potential access to additional dividends after ordinary shareholders have been paid. Redeemable shareholders can have their shares bought back or redeemed at their face value at the discretion of the company at a certain date.

(Learning objective 5.5 ~ understand the nature of and participants in the share market)

The ASX Trade platform facilitates share trading in Australia based on:

Select one:

a. time-price priority.

b. price-volume priority.

c. price-time priority.

d. none of the above.

**c.** price-time priority.

The ASX Trade platform facilitates share trading based on price-time priority with the ‘price’ being the highest price if someone is looking to buy shares and the lowest price if someone is looking to sell their shares. ‘Time’ priority is on a ‘first-come-first-serve’ basis and is secondary to the price offered/sought when applying the ASX Trade platform.

(Learning objective 5.6 ~ consider the influences on share prices)

Using sustainable growth rates:

Select one:

a. seeks to overcome the limitations of using past growth rates as a reliable indicator of future growth rates.

b. requires companies to have a retention ratio of less than 100%.

c. both a and b.

d. none of the above.

**c.** both a and b.

The use of sustainable growth rates is a method that seeks to overcome the limitations of using past growth rates as a reliable indicator of future growth rates and requires companies to have a retention ratio of less than 100% (that is, for the firm to pay some level of dividends).

(Learning objective 5.8 ~ apply two basic valuation models — the Gordon dividend discount model and the price–earnings ratio — to value shares)

The capital asset pricing model (CAPM):

Select one:

a. recognises a positive relationship between risk and return.

b. uses beta as the relevant measure of market risk.

c. requires a value for the risk-free rate.

d. all of the above.

**d.** all of the above.

All of the above issues are relevant for the capital asset pricing model (CAPM).

(Learning objective 5.7 ~ understand the capital asset pricing model (CAPM)

The Gordon dividend discount model has a number of problems which include:

Select one:

a. the required rate of return must be greater than the expected growth rate. If this is not the case, then the model will estimate a negative value for the share price (which is impossible).

b. if the expected growth rate is really greater than the required rate of return, then the Gordon growth model is not appropriate for valuation.

c. this model assumes that the fundamentals of the firm will remain constant over time.

d. all of the above.

**d.** all of the above.

This model has some special features. First, the required rate of return must be greater than the expected growth rate. If this is not the case, then the model will estimate a negative value (which is impossible — share prices on the market are always positive). If the expected growth rate is really greater than the required rate of return, then the Gordon growth model is not appropriate for valuation. Second, this model assumes that the fundamentals of the firm will remain constant. If the firm changes its payout ratio, for example, the firm’s growth rate will change and so the value of the firm will also change.

(Learning objective 5.8 ~ apply two basic valuation models — the Gordon dividend discount model and the price–earnings ratio — to value shares)

A 180-day $100 000 BAB (Commercial Bill) security is sold for $98 120. Calculate its yield.

*Pages 169 – 170 of textbook*

1 + *i* = 100,000/98,120 = 1.0192 Yield

= 0.0192 x 365/180

= 3.89%

Fiona is considering investing in either Share Apple or Share Pear. She has the following information.

What is the expected return on each share?

A 10-year bond is issued with a face value of $20 000 paying interest of $450 per annum. If market yields increase soon after the bond is issued, what happens to the bond’s:

(a) coupon rate?

(b) price?

(c) yield to maturity?

(a) coupon rate

- the interest rate paid on the fixed-interest security (fixed interest yield) - the coupon rate and the market rate is the *same* at the time of purchase

The coupon rate will remain the same ($450 per annum)

(b) price

The price of the bond will fall because the market rate of return is now greater than the coupon rate.

(c) yield to maturity

- The yield to maturity of the bond is the annualised discount rate that makes the PV of the future cash flows just equal to the current price of the bond.
- It represents the IRR of the bond at the market price.
- The yield increases in line with the market yield.

What is the theoretical value of the shares of a company where the dividend is expected to be 50 cents, its RoE is 17%, its payout ratio 45%, its beta is 1.4 and the market return is 14%, while the risk-free rate is 5%?

- Calculate the return on the share – see page 183*
- Calculate the value of the share – see page 187*

The **CAPM** gives the following relationship between **return** and risk:

*R _{i}*

_{ }=

*R*+

_{f}*ß*(

_{i}*R*-

_{m}*R*)

_{f}Return = risk free return + Beta (Market risk – risk free return) “risk premium”

Return (*r*) = 0.05 + 1.4(0.14-0.05) = 0.05 + 0.126 = 0.176

The **Gordon dividend discount model** can calculate growth – see page 186

sustainable growth rate (*g*) = retention ratio (*b*) x return on equity (RoE)

Retention ratio = 1 - payout ratio = 1 - 0.45 = 0.55

Growth (*g*) = *b*(RoE) = 0.55 x 0.17 = 0.0935

Now calculate **value** of share – see page 187

Value = Dividend per share (DPS) / required rate of return (*r*) – expected growth rate (*g*)

Value (*V _{0}*) = 0.5/(0.176 - 0.0935) = 0.5/.0.0825 $6.06

**Considering a term deposit**

Kate Turner has sold her house and, after repaying the amount outstanding on her home loan, has $200 000 available to invest. Kate does not want to buy another house for at least three years as she has decided to work overseas for that time. However, she does not want to take undue risks with her funds and does not want to put the money in the share market. Kate goes to her bank and asks for the interest rates on term deposits for the 3-year period. She is given a rate chart that shows:

Kate wonders what she should do with her $200 000. Should she put it all into a 3-year term deposit and forget about it until she returns or should she consider putting it into shorter-term fixed interest and then communicate with the bank as the term expires.

Questions

- How would you describe the interest rate yield curve? Explain why.

The interest rate yield curve is an inverse (downward-sloping) curve as longer-term rates are lower than shorter-term rates.

**Considering a term deposit**

Kate Turner has sold her house and, after repaying the amount outstanding on her home loan, has $200 000 available to invest. Kate does not want to buy another house for at least three years as she has decided to work overseas for that time. However, she does not want to take undue risks with her funds and does not want to put the money in the share market. Kate goes to her bank and asks for the interest rates on term deposits for the 3-year period. She is given a rate chart that shows:

Kate wonders what she should do with her $200 000. Should she put it all into a 3-year term deposit and forget about it until she returns or should she consider putting it into shorter-term fixed interest and then communicate with the bank as the term expires.

Questions

- Calculate the amount of interest that Kate would receive if she invests it all in the three-year term.

Kate would receive interest of $36,186.44 if the interest is compounded each year.

200,000 (1.057) ^ 3 = $236,186.44 – 200,000 = $36,186.44

If it is __not__ compounded, then each year she would receive $11,400 or a total of $34,200.

Total interest = [200,000 (0.057)] x 3 = 11400 x 3 = $34,200

**Considering a term deposit**

Kate Turner has sold her house and, after repaying the amount outstanding on her home loan, has $200 000 available to invest. Kate does not want to buy another house for at least three years as she has decided to work overseas for that time. However, she does not want to take undue risks with her funds and does not want to put the money in the share market. Kate goes to her bank and asks for the interest rates on term deposits for the 3-year period. She is given a rate chart that shows:

Kate wonders what she should do with her $200 000. Should she put it all into a 3-year term deposit and forget about it until she returns or should she consider putting it into shorter-term fixed interest and then communicate with the bank as the term expires.

Questions

- Calculate the present value of the interest and return of the principal in three years time if the inflation rate is 3 per cent p.a.

Real rate of return = 0.057 – 0.03 = 0.027 or 2.7%

Annual Interest Amount is = 0.027 * 200,000 = 5400

A discount rate is required to calculate the PVs of the interest annuities plus the PV of the principal, otherwise using the real rate of return of 2.7% will deliver the initial investment of principal of $200,000 as the present value of the amounts received.

**Considering a term deposit**

Questions

- Suppose Kate decides to take the highest return and invests all her money for 30 days. What risk does she take when the term matures and she then needs to reinvest the funds?

The risk that Kate takes if she invests all her money for 30 days at 6.3% is that at the end of 30 days the interest rates for any succeeding period may have fallen so that for the next 30 days the rates might not be 6.3% but less than 6.3% and may even be less than 6.2%. Given that there is an inverse yield curve it is likely that short-term rates will fall at some point.

**Considering a term deposit**

Questions

- Suggest a possible solution to assist Kate with her investment plans.

A possible solution for Kate is to use an average method whereby she might invest some amount for 30 days, some for 6 months, some for 12 months and so on.

In that way, Kate can lock in some amounts for the longer term at 5.9% and 5.7% but also gain some of the higher rates in the shorter term.