Expected 1-Year Interest Rates 2020 5.00% 2021 6.00% 2022 7.00% 2023 8.00% The aim of this question is to show you how the government (more precisely, the Fed) can change long-term interest rates by changing people's expectations about future short-term interest rates. Such a policy is called forward guidance. The above table shows the expectations of bond market investors about future 1-year interest rates. For example, the interest rate on the 1-year bond in 2020 is 5.00% (this one is known with certainty in 2020). The market expects the interest rate on the 1-year bond in 2021 to be 6.00 percent, and so on. So currently: Interest rate on the 2-year bond in 2020 = percent Interest rate on the 3-year bond in 2020 = percent Interest rate on the 4-year bond in 2020 = percent The Fed announces that beginning in 2022 it will keep the 1-year interest rate at 6.00% for every subsequent year. Assume that people believe that the Fed will be successful in achieving this goal. As a result: Interest rate on the 2-year bond in 2020 = percent Interest rate on the 3-year bond in 2020 = percent Interest rate on the 4-year bond in 2020 - percent

Expected 1-Year Interest Rates 2020 5.00% 2021 6.00% 2022 7.00% 2023 8.00% The aim of this question is to show you how the government (more precisely, the Fed) can change long-term interest rates by changing people's expectations about future short-term interest rates. Such a policy is called forward guidance. The above table shows the expectations of bond market investors about future 1-year interest rates. For example, the interest rate on the 1-year bond in 2020 is 5.00% (this one is known with certainty in 2020). The market expects the interest rate on the 1-year bond in 2021 to be 6.00 percent, and so on. So currently: Interest rate on the 2-year bond in 2020 = percent Interest rate on the 3-year bond in 2020 = percent Interest rate on the 4-year bond in 2020 = percent The Fed announces that beginning in 2022 it will keep the 1-year interest rate at 6.00% for every subsequent year. Assume that people believe that the Fed will be successful in achieving this goal. As a result: Interest rate on the 2-year bond in 2020 = percent Interest rate on the 3-year bond in 2020 = percent Interest rate on the 4-year bond in 2020 - percent

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Why does longer-term bonds fluctuate more when interest rate change, than does shorter-term bonds
Short-term interest rates: fluctuate widely, depending on their terms. tend to move together. always move in the same direction as long-term interest rates. are always above long-term interest rates.
Suppose you observe that short-term interest rates are higher than long-term interest rates. a. What expectations must people have regarding future interest rates? b. Why might the above relationship signal a recession? Why might it not? c. What will the yield curve for this problem look like? Q4 Why is the fact that stock prices follow a random walk a signal of stock market efficiency? What would have to be true if stock prices did not follow a random walk?
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 Year Rate 1 2.00% 2 4.00% 3 5.00% 4 8.00% 5 11.00% Multiyear Bond Rate 2.00% 5.00% 7.00% 9.00% 10.00% The liquidity premiums for each year are given as: (Enter your responses rounded to two decimal places.) 11 = 0% 21 = 131 = 55 141 = = % do do do do % % %
Given it = 10%, P = 120.0, P+1 = 129.6 and P+₁ = 130.8, calculate the t+1 expected real interest rate in period t: The expected real interest rate = percentage to one decimal place). % (enter your response as a
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Suppose the current annual interest rate on a one-year government bond is 8% and the expected annual interest rate on a one-year bond one year from now is 8.5%, and a one- year bond two years from now is 9%. Based on this information, the current annual interest rate on a three-year government bond is approximately, A. 8.0% B. 9.0% 8.5% D. 8.2% 10% ABCDE C. E.
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If inflation rises, why is a bond more likely to be sold at a discount to its face value?Explain, with reference to the bond’s coupon.
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Ryan and Rebecca have 30 years to retirement. They are taking a personal finance course and have calculated their projected retirement income and investment needs. Based on their calculations and taking into account their Social Security and pension incomes, they have a projected shortfall of $6,250.00 per year. Use the following tables to answer the questions about future value interest factors. Interest Factors—Future Value Interest Factors—Future Value of an Annuity Excel Periods 3.00% 5.00% 6.00% 8.00% 9.00% 20 1.810 2.653 3.210 4.661 5.600 25 2.090 3.386 4.290 6.848 8.620 30 2.420 4.322 5.740 10.062 13.260 35 2.810 5.516 7.690 14.785 20.410 40 3.260 7.040 10.280 21.724 31.410 The impact of the inflation factor Continuing their worksheet, they consult a friend, economics professor Dr. Garcia, who believes that they can expect the average annual inflation rate to be 5%, possibly 6% tops. Complete the following table by…