Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 30, Problem 1TY
To determine
Explain the impact if 8% increase in expected default.
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Why are bond prices and interest rates inversely related?
The following are data on the Treasury yield curve for July 17, 2012:
Time to maturity
Interest rate
6 months
0.15%
1 year
0.18%
2 years
0.25%
5 years
0.62%
10 years
1.53%
30 years
2.59%
Source: U.S. Department of the Treasury, "Daily Treasury Yield Curve Rates," July 17, 2012.
Given these data, why would an investor have been willing to buy a one-year Treasury bill with an interest rate of only 0.18% when the investor could have bought a
30-year Treasury bond with an interest rate of 2.59%?
O A. An investor would expect interest rates on short-term bonds to be higher in the future.
O B. Investors are exposed to greater interest-rate risk when they buy long-term bonds versus buying short-term bonds.
OC. Most investors have a life expectancy for investing purposes of less than 30 years.
O D. A andB only.
O E. All of the above.
Suppose everyone expects investment to rise sharply in three months. How would this expectation be likely to affect bond prices?
Chapter 30 Solutions
Economics: Principles & Policy
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Similar questions
- An FI has purchased a $201 million cap of 8 percent at a premium of 0.70 percent of face value. A $201 million floor of 4.1 percent is also available at a premium of .75 percent of face value. a. If interest rates rise to 9 percent, what is the amount received by the FI? What are the net savings after deducting the premium? b. If the Fl also purchases a floor, what are the net savings if interest rates rise to 10 percent? What are the net savings if interest rates fall to 3.1 percent? (Negative amounts should be indicated by a minus sign.) c. If, instead, the Fl sells (writes) the floor, what are the net savings if interest rates rise to 10 percent? What if they fall to 3.1 percent? (Negative amounts should be indicated by a minus sign.) a. Amount received Net savings b. Net savings if interest rates rise to 10 percent Net savings if interest rates fall to 3.1 percent c. Net savings if interest rates rise to 10 percent Net savings if they fall to 3.1 percentarrow_forward: Show graphically the effect of a rise in expected inflation on interest rates in the bond market.arrow_forwardprove that bond yields and bond prices are inversely related?arrow_forward
- A bond has a Macaulay duration of 10.00 and is priced to yield 8.0%. If interest rates go up so that the yield goes to 8.5%, what will be the percentage change in the price of the bond? Now, if the yield on this bond goes down to 7.5%, what will be the bond's percentage change in price? Comment on your findings. If interest rates go up to 8.5%, the percentage change in the price of the bond is nothing%. (Round to two decimal places.) If interest rates go down to 7.5%, the percentage change in the price of the bond is nothing%. (Round to two decimal places.) Comment on your findings. (Select the best answer below.) A. As interest rates decrease, the price of the bond decreases. As interest rates increase, the price of the bond increases. B. As interest rates increase or decrease, the price of the bond will always increase. C. As interest rates increase or decrease, the price of the bond remains the same. D. As interest rates…arrow_forwardBelow you will find the Demand and Supply Curves for $250,000 bonds that mature in 18 years: Qd = 400,000 – 2(P) Qs = 3(P) – 100,000 If the Fed wants to move the interest rate to 5%, what would the bond price have to change to in order to achieve this?arrow_forwardWhat will happen in the bond market if the government imposes a limit on the amount of daily transactions? Which characteristic of an asset would be affected? How might it affect the interest rates. Explain with a graph. I want to see the answer to this question and steps. Thanksarrow_forward
- What will happen in the bond market if the government imposes a limit on the amount of daily transactions? Which characteristic of an asset would be affected? How might it affect the interest rates. Explain with a graph.arrow_forwardRaphael observes that at the current level of interest ratesthere is an excess supply of bonds, and therefore he anticipates an increase in the price of bonds. Is Raphael correct?arrow_forwardQ1: “If the bonds of different maturities are perfectly substituted, their interest rates are more likely to move together”. Is this statement true or false or uncertain? Discuss using the theory of expectation.arrow_forward
- A shift in the demand curve for bonds occurs when the quantity demanded changes at each given interest rate. When a shift takes place, there will be a new equilibrium value for the interest rate. Explain how expected returns result in a shift in the demand for bonds.arrow_forwardUsing both the liquidity preference framework and the supply and demand for bonds framework, show why interest rates are procyclical ( rising when the economy is expanding and falling during recessions DRAW THE GRAPHS (there will be 2 of them) and explain EACH grapharrow_forward
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