FINA3010 Financial Markets

Chris Leung, Ph.D., CFA, FRM

Email: chrisleung@cuhk.edu.hk

1
Lecture 4

Determinants of Interest Rates

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 Lecture Preview

 In this lecture, we examine the forces

the move interest rates and the
theories behind those movements.
Topics include:
⚫ Determinants of Asset Demand
⚫ Supply and Demand in the Bond Market
⚫ Changes in Equilibrium Interest Rates

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 Lecture Preview

 Then, we will also examine how the

individual risk of a bond affects its
required rate. We also explore how
the general level of interest rates
varies with the maturity of the debt
instruments. Topics include:
⚫ Risk Structure of Interest Rates
⚫ Term Structure of Interest Rates

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Determinants of Asset Demand

 An asset is a piece of property

that is a store of value. Facing
the question of whether to buy
and hold an asset or whether to
buy one asset rather than
another, an individual must
consider the following factors:

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 Determinants of Asset Demand
1. Wealth, the total resources owned by the
individual, including all assets
2. Expected return (the return expected over
the next period) on one asset relative to
alternative assets
3. Risk (the degree of uncertainty associated
with the return) on one asset relative to
alternative assets
4. Liquidity (the ease and speed with which an
asset can be turned into cash) relative to
alternative assets

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 EXAMPLE 1: Expected Return
What is the expected return on the Lehman
Brothers so-called Mini-Bond (actually,
CDO+CDS) if the return is 12% two-thirds of
the time and 8% one-third of the time?
Solution
The expected return is 10.68%.
Re = p1R1 + p2R2
where
p1 = probability of occurrence of return 1 =2/3 = .67
R1 = return in state 1 =12% = 0.12
p2 = probability of occurrence return 2 =1/3 = .33
R2 = return in state 2 =8% = 0.08
Thus
Re = (.67)(0.12) + (.33)(0.08) = 0.1068 = 10.68%

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EXAMPLE 2: Standard Deviation (a)

 Fly-by-Night Airlines stock

⚫ 50% chance 15% return
⚫ 50% chance 5% return
 Feet-on-the-Ground Bus Company
⚫ Fixed return of 10%

 What is the standard deviation of the

returns on the Fly-by-Night Airlines stock
and Feet-on-the Ground Bus Company?
Of these two stocks, which is riskier?

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EXAMPLE 2: Standard Deviation (b)

 Solution
⚫ Fly-by-Night Airlines has a standard deviation of
returns of 5%.

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EXAMPLE 2: Standard Deviation (c)

 Feet-on-the-Ground Bus Company has a

standard deviation of returns of 0%.

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EXAMPLE 2: Standard Deviation (d)
 Fly-by-Night Airlines has a standard
deviation of returns of 5%; Feet-on-the-
Ground Bus Company has a standard
deviation of returns of 0%
 Clearly, Fly-by-Night Airlines is a riskier
stock because its standard deviation of
returns of 5% is higher than the zero
standard deviation of returns for Feet-on-
the-Ground Bus Company, which has a
certain return

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 EXAMPLE 2: Standard Deviation (e)

 A risk-averse person prefers stock in the

Feet-on-the-Ground (the sure thing) to
Fly-by-Night stock (the riskier asset), even
though the stocks have the same expected
return, 10%. By contrast, a person who
prefers risk is a risk preferrer or risk lover.
Most people are risk-averse, especially in
their financial decisions.

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 Determinants of Asset Demand (2)
 The quantity demanded of an asset differs by factor.
1. Wealth: Holding everything else constant, an increase in
wealth raises the quantity demanded of an asset
2. Expected return: An increase in an asset’s expected
return relative to that of an alternative asset, holding
everything else unchanged, raises the quantity
demanded of the asset
3. Risk: Holding everything else constant, if an asset’s risk
rises relative to that of alternative assets, its quantity
demanded will fall
4. Liquidity: The more liquid an asset is relative to
alternative assets, holding everything else unchanged,
the more desirable it is, and the greater will be the
quantity demanded

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Determinants of Asset Demand (3)

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 Supply & Demand in the Bond Market

We now turn our attention to the mechanics of interest

rates. That is, we are going to examine how interest
rates are determined – from a demand and supply
perspective. Keep in mind that these forces act
differently in different bond markets. That is, current
supply/demand conditions in the corporate bond market
are not necessarily the same as, say, in the mortgage
market. However, because rates tend to move together,
we will proceed as if there is one interest rate for the
entire economy.

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 The Demand Curve

Let’s start with the demand curve.

Let’s consider a one-year discount bond with a face

value of $1,000. In this case, the return on this bond is
entirely determined by its price. The return is, then, the
bond’s yield to maturity.

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 Derivation of Demand Curve

How do we know the demand (Bd) curve is downward sloping?

We are applying basic economics – more people will want

(demand) the bonds if the expected return is higher (most assets:
cheaper→ you buy more).

Lower Price  Higher Return

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 Derivation of Supply Curve

How do we know the supply curve (Bs) is upward sloping?

Again, like the demand curve, we are applying basic economics –

more people will offer (supply) the bonds if the expected return is
lower (most assets: more expensive→ you sell more).

Higher Price  Lower Interest Cost

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Supply and Demand Analysis
of the Bond Market (1-Yr Zero Coupon Bond)

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 Market Equilibrium
1. Occurs when Bd = Bs, at P* = 850, i* =
17.6%

2. When P = $950, i = 5.3%, Bs > Bd

(excess supply): P  to P*, i  to i*

3. When P = $750, i = 33.0, Bd > Bs

(excess demand): P  to P*, i  to i*

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Market Demand Conditions
Market equilibrium occurs when the amount that
people are willing to buy (demand) equals the
amount that people are willing to sell (supply) at a
given price
Excess supply occurs when the amount that people
are willing to sell (supply) is greater than the
amount people are willing to buy (demand) at a
given price
Excess demand occurs when the amount that
people are willing to buy (demand) is greater than
the amount that people are willing to sell (supply) at
a given price

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Changes in Equilibrium Interest Rates

We now turn our attention to changes in

interest rate. We focus on actual shifts in
the curves.

Remember: movements along the curve will

be due to price changes alone.

First, we examine shifts in the demand for

bonds. Then we will turn to the supply side.

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Shifts in the Demand Curve

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How Factors Shift the Demand Curve

1. Wealth
⚫ Economy , wealth , Bd , Bd shifts
out to right
2. Expected Return
⚫ i  in future, Re for long-term bonds ,
Bd , Bd shifts out to right
⚫ e , relative Re , Bd , Bd shifts out
to right

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How Factors Shift the Demand Curve

3. Risk
⚫ Risk of bonds , Bd , Bd shifts out to
right
⚫ Risk of other assets , Bd , Bd shifts
out to right
4. Liquidity
⚫ Liquidity of bonds , Bd , Bd shifts
out to right
⚫ Liquidity of other assets , Bd ,Bd
shifts out to right

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Factors That Shift Demand Curve

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Summary of Shifts
in the Demand for Bonds

1. Wealth: in a business cycle expansion

with growing wealth, the demand for
bonds rises, conversely, in a recession,
when income and wealth are falling, the
demand for bonds falls
2. Expected returns: higher expected
interest rates in the future decrease the
demand for long-term bonds, conversely,
lower expected interest rates in the
future increase the demand for long-
term bonds
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Summary of Shifts
in the Demand for Bonds (2)

3. Risk: an increase in the riskiness of

bonds causes the demand for bonds to
fall, conversely, an increase in the
riskiness of alternative assets (like
stocks) causes the demand for bonds
to rise
4. Liquidity: increased liquidity of the
bond market results in an increased
demand for bonds, conversely, increased
liquidity of alternative asset markets
(like the stock market) lowers the
demand for bonds 28
Shifts in the Supply Curve

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Shifts in the Supply Curve
1. Profitability of Investment
Opportunities
⚫ Business cycle expansion, investment
opportunities , Bs , Bs shifts out to
right
2. Expected Inflation
⚫ e , Bs , Bs shifts out to right
3. Government Activities
⚫ Deficits , Bs , Bs shifts out to right

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Factors That Shift Supply Curve

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Summary of Shifts
in the Supply of Bonds
1. Expected Profitability of Investment
Opportunities: in a business cycle expansion,
the supply of bonds increases, conversely, in a
recession, when there are far fewer expected
profitable investment opportunities, the supply
of bonds falls
2. Expected Inflation: an increase in expected
inflation causes the supply of bonds to increase
3. Government Activities: higher government
deficits increase the supply of bonds, conversely,
government surpluses decrease the supply of
bonds

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Fisher Effect

We’ve done the hard work. Now we

turn to analysis of the interaction
between supply and demand.
The first is the Fisher Effect.
⚫ Recall that rates are composed of several
components: a real rate, an inflation
premium, and various risk premiums.

What if there is only a change in

expected inflation?
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 Changes in e: The Fisher Effect

 If e 
1. Relative Re ,
Bd , Bd shifts
in to left
2. Bs , Bs shifts
out to right
3. P , i 

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 Expected Inflation and Interest Rates (Three-Month
Treasury Bills), 1953–2016

Source: Expected inflation calculated using procedures outlined in Frederic S. Mishkin, “The Real Interest
Rate: An Empirical Investigation,” Carnegie-Rochester Conference Series on Public Policy 15 (1981): 151–
200. These procedures involve estimating expected inflation as a function of past interest rates, inflation,
and time trends. Nominal three-month Treasury bill rates from Federal Reserve Bank of St. Louis FRED
database: https://fred.stlouisfed.org/series/TB3MS and https://fred.stlouisfed.org/series/CPIAUCSL
 Summary of the Fisher Effect
1. If expected inflation rises, say from 5% to 10%,
the expected return on bonds relative to real assets
falls and, as a result, the demand for bonds falls
2. The rise in expected inflation also means that the
real cost of borrowing has declined, causing the
quantity of bonds supplied to increase
3. When the demand for bonds falls and the quantity
of bonds supplied increases, the equilibrium bond
price falls
4. Since the bond price is negatively related to the
interest rate, this means that the interest rate will
rise

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Business Cycle Expansion

Another good thing to examine is an

expansionary business cycle. Here,
the amount of goods and services for
the country is increasing, so national
income is increasing.

What is the expected effect on

interest rates?

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 Business Cycle Expansion

1. Wealth , Bd , Bd
shifts out to right
2. Investment , Bs , Bs
shifts right
3. If Bs shifts more than
Bd then P , i  (the
usual outcome of an
expansion)

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 Business Cycle and Interest Rates (Three-
Month Treasury Bills), 1951–2016

Source: Federal Reserve Bank of St. Louis, FRED database: https://fred.stlouisfed.org/series/TB3MS.

 Profiting from Interest-Rate Forecasts
 Methods for forecasting
1. Supply and demand for bonds: use Flow
of Funds Accounts and judgment
2. Econometric Models: large in scale, use
interlocking equations that assume past
financial relationships will hold in the
future
3. Fed’s FOMC announcements
https://www.federalreserve.gov/newsevents/pressreleases/monetary20190731a.htm
https://www.federalreserve.gov/newsevents/pressreleases/monetary20190918a.htm

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Profiting from Interest-Rate Forecasts
(cont.)

 Make decisions about assets to hold

1. Forecast i , buy long-maturity bonds
2. Forecast i , buy short-maturity bonds

 Make decisions about how to borrow

1. Forecast i , borrow short-term
2. Forecast i , borrow long-term

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How Do Risk and Term Structure Affect
Interest Rates?

In the first half of this lecture, we

examined interest rates, but made a
big assumption—there is only one
economy-wide interest rate. Of course,
that is not really the case.
In the second half, we will examine
the different rates that we observe for
financial products.

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Risk Structure of Interest Rates

 To start this discussion, we first

examine the yields for several
categories of long-term bonds over
the last 90 years.
 You should note several aspects
regarding these rates, related to
different bond categories and how
this has changed through time.

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 Long-Term Bond Yields, 1919–2016

Sources: Board of Governors of the Federal Reserve System, Banking and Monetary Statistics, 1941–
1970; Federal Reserve Bank of St. Louis FRED database, https://fred.stlouisfed.org/series/GS10,
https://fred.stlouisfed.org/series/AAA, https://fred.stlouisfed.org/series/BAA.
 Risk Structure
of Long Bonds in the U.S.

The figure show two important features

of the interest-rate behavior of bonds.

1. Rates on different bond categories

change from one year to the next.

2. Spreads on different bond categories

change from one year to the next.

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 Factors Affecting Risk Structure
of Interest Rates

To further examine these features, we will

look at three specific risk factors.

 Default Risk

 Liquidity

 Income Tax Considerations

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 Default Risk Factor
 One attribute of a bond that influences its
interest rate is its risk of default, which
occurs when the issuer of the bond is
unable or unwilling to make interest
payments when promised.
 U.S. Treasury bonds have usually been
considered to have no default risk because
the federal government can always
increase taxes to pay off its obligations.
Bonds like these with no default risk are
called default-free bonds.

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 Default Risk Factor (cont.)

 The spread between the interest rates on

bonds with default risk and default-free
bonds, called the risk premium, indicates
how much additional interest people must
earn in order to be willing to hold that risky
bond.
 A bond with default risk will always have a
positive risk premium, and an increase in its
default risk will raise the risk premium.

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Increase in Default Risk
on Corporate Bonds

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Analysis of Default Risk: Increase in
Default on Corporate Bonds

 Corporate Bond Market

1. Re on corporate bonds , Dc , Dc shifts left
2. Risk of corporate bonds , Dc , Dc shifts left
3. Pc , ic 
 Treasury Bond Market
4. Relative Re on Treasury bonds , DT , DT shifts
right
5. Relative risk of Treasury bonds , DT , DT
shifts right
6. PT , iT 
 Outcome
⚫ Risk premium, ic - iT, rises

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 Bond Ratings by Moody’s and Standard and Poor’s

Moody’s S&P Description Examples of Corporations with

Rating Rating Bonds Outstanding in 2016
Aaa AAA Highest quality Microsoft, Johnson&Johnson
(lowest default risk)
Aa AA High quality Apple, General Electric
A A Upper-medium MetLife, Intel, Harley-Davidson
grade
Baa BBB Medium grade McDonalds, Bank of America, HP,
FedEx, Southwest Airlines
Ba BB Lower-medium Best Buy, American Airlines, Delta
grade Airlines, United Airlines
B B Speculative Netflix, Rite Aid, J.C. Penney
Caa CCC,CC Poor (high default Sears, Elizabeth Arden
risk)
C D Highly speculative Halcon Resources, Seventy-Seven
Energy
 Liquidity Factor
 Another attribute of a bond that influences its
interest rate is its liquidity; a liquid asset is
one that can be quickly and cheaply
converted into cash if the need arises. The
more liquid an asset is, the more desirable it
is (holding everything else constant).
 U.S. Treasury bonds are the most liquid of all
long-term bonds because they are so widely
traded that they are the easiest to sell quickly
and the cost of selling them is low.

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 Liquidity Factor (cont.)
 Corporate bonds are not as liquid because
fewer bonds for any one corporation are
traded; thus it can be costly to sell these
bonds in an emergency because it may be
hard to find buyers quickly.
 The differences between interest rates on
corporate bonds and Treasury bonds (that
is, the risk premiums) reflect not only the
corporate bond’s default risk but its
liquidity too. This is why a risk premium is
sometimes called a liquidity premium.

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Decrease in Liquidity
of Corporate Bonds

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Analysis of Liquidity: Corporate Bond
Becomes Less Liquid

 Corporate Bond Market

1. Liquidity of corporate bonds , Dc , Dc shifts left
2. Pc , ic 
 Treasury Bond Market
1. Relative liquidity of Treasury bonds , DT , DT
shifts right
2. PT , iT 
 Outcome
⚫ Risk premium, ic - iT, rises
 Risk premium reflects not only corporate bonds'
default risk but also lower liquidity

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Income Taxes Factor

 An odd feature of figures is that

municipal bonds tend to have a lower
rate the Treasuries. Why?
 Munis certainly can default. Orange
County (California) is a recent
example from the early 1990s.
 Munis are not as liquid as Treasuries.

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Income Taxes Factor

 Interest payments on municipal

bonds are exempt from federal
income taxes, a factor that has the
same effect on the demand for
municipal bonds as an increase in
their expected return

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Tax Advantages of Municipal Bonds

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Tax Advantages of Municipal Bonds

 Municipal Bond Market

1. Tax exemption raises relative Re on
municipal bonds,
Dm , Dm shifts right
2. Pm , im 
 Treasury Bond Market
1. Relative Re on Treasury bonds , DT , DT
shifts left
2. PT , iT 
 Outcome
im < iT (Most of the time)
uReply 4-1, 4-2
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Term Structure of Interest Rates

Now that we understand risk,

liquidity, and taxes, we turn to
another important influence on
interest rates – maturity.
Bonds with different maturities, all
else equal, tend to have different
required rates.

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 Movements over Time of Interest Rates on U.S.
Government Bonds with Different Maturities

Source: Federal Reserve Bank of St. Louis, FRED database, https://fred.stlouisfed.org/series/TB3MS;

https://fred.stlouisfed.org/series/GS3; https://fred.stlouisfed.org/series/GS5;
https://fred.stlouisfed.org/series/GS20: Yield curve, http://finance.yahoo.com/bonds.
Term Structure of Interest Rates

Let’s see the Term Structure (Yield Curve)

http://stockcharts.com/charts/YieldCurve.html

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 Term Structure Facts to Be Explained

Besides explaining the shape of the yield

curve, a good theory must explain why:
• Interest rates for different maturities
move together
• Yield curves tend to have steep upward
slope when short rates are low and
downward slope when short rates are
high
• Yield curve is typically upward sloping

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Three Theories of Term Structure
A. Pure Expectations Theory
⚫ Pure Expectations Theory explains 1 and 2,
but not 3
B. Market Segmentation Theory
⚫ Market Segmentation Theory explains 3, but
not 1 and 2
C. Liquidity Premium Theory
⚫ Solution: Combine features of both Pure
Expectations Theory and Market
Segmentation Theory to get Liquidity
Premium Theory and explain all facts

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Expectations Theory

 Key Assumption: Bonds of

different maturities are perfect
substitutes
 Implication: Re on bonds of
different maturities are equal

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Expectations Theory

To illustrate what this means,

consider two alternative investment
strategies for a two-year time
horizon.
1. Buy $1 of one-year bond, and when
it matures, buy another one-year
bond with your money.
2. Buy $1 of two-year bond and hold it.

66
 Expectations Theory

The important point of this theory is

that if the Expectations Theory is
correct, your expected wealth (return)
is the same (a the start) for both
strategies. Of course, your actual
wealth may differ, if rates change
unexpectedly after a year.

67
 Expectations Theory

 Expected return from strategy 1

(1 + it )(1 + i ) − 1 = 1 + it + i
e
t +1
e
t +1
+ it (i ) − 1
e
t +1

Since it(iet+1) is also extremely small,

expected return is approximately
it + iet+1

68
Expectations Theory

 Expected return from strategy 2

(1 + i2t )(1 + i2t ) − 1 = 1 + 2(i2t ) + (i2t )2 − 1

Since (i2t)2 is extremely small,

expected return is approximately 2(i2t)

69
Expectations Theory
 From implication above expected returns
of two strategies are equal
 Therefore

2(i2t ) = it + i e
t +1

Solving for i2t

it + ie
i2t = t +1
(1)
2
70
Expectations Theory

 To help see this, here’s a picture that

describes the same information:

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 More generally for n-period bond…
it + it +1 + it + 2 + ... + it + (n−1)
int = (2)
n

 Don’t let this seem complicated.

Equation 2 simply states that the
interest rate on a long-term bond
equals the average of short rates
expected to occur over life of the
long-term bond.

72
More generally for n-period bond…

 Numerical example
⚫ One-year interest rate over the next five years
are expected to be 5%, 6%, 7%, 8%, and 9%
 Interest rate on two-year bond today:
(5% + 6%)/2 = 5.5%
 Interest rate for five-year bond today:
(5% + 6% + 7% + 8% + 9%)/5 = 7%
 Interest rate for one- to five-year bonds
today:
5%, 5.5%, 6%, 6.5% and 7%

73
 Expectations Theory
and Term Structure Facts

 Explains why yield curve has different slopes

1. When short rates are expected to rise in future,
average of future short rates = int is above
today's short rate; therefore yield curve is
upward sloping.
2. When short rates expected to stay same in
future, average of future short rates same as
today's, and yield curve is flat.
3. Only when short rates expected to fall will yield
curve be downward sloping.

74
 Expectations Theory
and Term Structure Facts
 Pure expectations theory explains fact
1—that short and long rates move
together
1. Short rate rises are persistent
2. If it  today, iet+1, iet+2 etc.  
average of future rates   int 
3. Therefore: it   int 
(i.e., short and long rates move together)

75
 Expectations Theory
and Term Structure Facts
 Explains fact 2—that yield curves tend to have
steep slope when short rates are low and
downward slope when short rates are high
1. When short rates are low, they are expected to
rise to normal level, and long rate = average of
future short rates will be well above today's short
rate; yield curve will have steep upward slope.
2. When short rates are high, they will be expected
to fall in future, and long rate will be below
current short rate; yield curve will have
downward slope.

76
Expectations Theory
and Term Structure Facts

 Doesn't explain fact 3—that yield

curve usually has upward slope
⚫ Short rates are as likely to fall in future
as rise, so average of expected future
short rates will not usually be higher
than current short rate: therefore,
yield curve will not usually
slope upward.

77
 Market Segmentation Theory

 Key Assumption: Bonds of different maturities are

not substitutes at all

 Implication: Markets are completely segmented;

interest rate at each maturity
determined separately

78
Market Segmentation Theory
 Explains fact 3—that yield curve is usually
upward sloping
⚫ People typically prefer short holding periods
and thus have higher demand for short-term
bonds, which have higher prices and lower
interest rates than long bonds
 Does not explain fact 1 or fact 2 because
its assumes long-term and short-term
rates are determined independently

79
 Liquidity Premium Theory

 Key Assumption: Bonds of different maturities

are substitutes, but are not
perfect substitutes
 Implication: Modifies Pure Expectations
Theory with features of Market
Segmentation Theory

80
Liquidity Premium Theory
 Investors prefer short rather than long
bonds

  must be paid positive liquidity premium,

lnt, to hold long term bonds

81
Liquidity Premium Theory

 Results in following modification of

Pure Expectations Theory

it + ite+1 + ite+ 2 + ... + ite+ (n−1)

int = + nt
(3)
n

82
Liquidity Premium Theory

83
Numerical Example

1. One-year interest rate over the

next five years: 5%, 6%, 7%, 8%,
and 9%
2. Investors' preferences for holding
short-term bonds so liquidity
premium for one- to five-year
bonds: 0%, 0.25%, 0.5%, 0.75%,
and 1.0%

84
 Numerical Example

 Interest rate on the two-year bond:

0.25% + (5% + 6%)/2 = 5.75%
 Interest rate on the five-year bond:
1.0% + (5% + 6% + 7% + 8% + 9%)/5 = 8%
 Interest rates on one to five-year bonds:
5%, 5.75%, 6.5%, 7.25%, and 8%
 Comparing with those for the pure expectations
theory, liquidity premium theory produces yield
curves more steeply upward sloped

85
 Liquidity Premium Theory:
Term Structure Facts

 Explains All 3 Facts

⚫ Explains fact 3—that usual upward sloped
yield curve by liquidity premium for long-
term bonds
⚫ Explains fact 1 and fact 2 using same
explanations as pure expectations theory
because it has average of future short
rates as determinant of long rate

86
Market Predictions of Future Short Rates

87
 Forecasting Interest Rates with the
Term Structure
 Pure Expectations Theory: Invest in 1-period bonds
or in two-period bond 

(1 + it )(1 + ite+1 )− 1 = (1+ i2t )(1 + i2t ) − 1

Solve for forward rate, iet+1
e
it +1 =
(1 + i2t )
2

−1 (4)
1 + it

Numerical example: i1t = 5%, i2t = 5.5%

(1 + 0.055)2
ite+1 = − 1 = 0.06 = 6%
1 + 0.05
88
 Forecasting Interest Rates with the
Term Structure

 Compare 3-year bond versus 3 one-year bonds

(1 + it )(1 + ite+1 )(1 + ite+2 )− 1 = (1 + i3t )(1+ i3t )(1 + i3t ) − 1

Using iet+1 derived in (4), solve for iet+2

e
=
(1 + i3t )
3

i 2 −1
t +2
(1+ i2t )

89
 Forecasting Interest Rates
with the Term Structure
 Generalize to:

ie
=
(1+ in+1t )
n +1

−1 (5)
(1 + int )
t +n n

Liquidity Premium Theory: int - = same as pure

expectations theory; replace int by int - in (5)
to get adjusted forward-rate forecast

ie
=
(1+ in+1t − n +1t )
n+1

−1 (6)
(1+ int − nt )
t +n n

90
Assignment 1.4

 Textbook Chapter 4 (page 127 )

 Questions: 9, 13
 Quantitative Problems: 3

 Textbook Chapter 5 (page 154-155)

 Questions: 6
 Quantitative Problems: 1, 2, 5

91