Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 25.A, Problem 1P
To determine
To explain the differences’ interest rates.
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The table below shows current and expected future one-year interest rates, as well as current interest rates on multiyear bonds. Use the table to calculate the liquidity premium for each multiyear bond.
One-Year Bond
Rate
2.00%
3.00%
6.00%
7.00%
8.00%
31 =
141 =
151 =
The liquidity premiums for each year are given as: (Enter your responses rounded to two decimal places.)
11 = 0%
¹21 =
%
1%
1%
Year
1
2
%
3
4
5
Multiyear Bond Rate
2.00%
4.00%
6.00%
9.00%
12.00%
The table below shows interest rates on 10-year bonds for a sample of American countries (Source:
Bloomberg, 08/2018). What factors explain why the rate for a 10-year bond is higher in Brazil and
Mexico than US and Canada?
10-Year Government Bond Yields
COUNTRY
United States
Canada
Brazil
Mexico
YIELD
2.88%
2.30%
11.81%
7.77%
A higher default risk for Brazil and Mexico and lower expected inflation in US and Canada.
A lower default risk for Brazil and Mexico and lower expected inflation in US and Canada.
A higher default risk for Brazil and Mexico and higher expected inflation in US and Canada.
A lower default risk for Brazil and Mexico and higher expected inflation in US and Canada.
Draw the supply and demand curves for the
bond and explain what will happen to the
equilibrium price and quantity of the bond for
each of the following situations:
a) The inflation rate is expected to increase.
b) The wealth of economic agents in the
economy increases, but at the same time, the
Ministry of Finance increases the corporate
income tax rate.
c) The economy is experiencing expansion.
d) The government runs a budget deficit.
e) Most corporate bonds (ratings) have been
downgraded
Chapter 25 Solutions
Principles of Economics (12th Edition)
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