1. a)What is the term structure of the interest rates (10 marks)
b) Describe three theories that explain the term structure of interest rates. (15 marks)

2. a)What factors cause the demand and supply of loanable funds to shift. (13 marks)
b) What role does interest rate play in the economic development of a country. (12 marks)

3. i) A bond you are evaluating has a 10% coupon rate, a face value of kshs 1000, and is 10 years from maturity.

a) If the required rate of return on the bond is 10% what is its fair present value? (6 marks)
b) If the required rate of return on the bond is 12%, what is its fair present value? (4 marks)
”c) What does your answer-to part-a) and b) say about the relation ”between required rates of return and fair values of the bond? (4 marks)
ii) How are financial intermediaries able to engage in maturity transformation? (11 marks)

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