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Question 3 (50 marks) a) Explain the reason(s) why bond ratings and interest rate spreads...

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Question 3 (50 marks) a) Explain the reason(s) why bond ratings and interest rate spreads on bonds differ. Which measure is considered by many investors to be a more comprehensive measure of risk? Why? (30 marks) b) Suppose that the current spot exchange rate of U.S. dollars for Australian dollars, Suss/as, is 0.757 (.e. $0.757 US dollar can be received for 1 Australian dollar). The price of Australian-produced goods increases by 5 percent (.e. inflation in Australia, IPA, is 5 percent), and the U.S. price index increases by 3 percent (i.e. inflation in the United States, IPus, is 3 percent). Calculate the new spot exchange rate of U.S. dollars for Australian dollars that should result from the differences in inflation rates, (20 marks)

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