a-rated bonds currently yield 8%, while Aa-rated bonds yield 6%. Suppose that elds on both bonds increase by 1.1%. Calculate the new confidence index? (Round your answer to 3 decimal places. Answer is complete but not entirely correct. onfidence index 0.282 X
a-rated bonds currently yield 8%, while Aa-rated bonds yield 6%. Suppose that elds on both bonds increase by 1.1%. Calculate the new confidence index? (Round your answer to 3 decimal places. Answer is complete but not entirely correct. onfidence index 0.282 X
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
![**Example Problem on Calculating the Confidence Index**
*Problem Statement:*
Baa-rated bonds currently yield 8%, while Aa-rated bonds yield 6%. Suppose that due to an increase in the expected inflation rate, the yields on both bonds increase by 1.1%.
a. Calculate the new confidence index. (Round your answer to 3 decimal places.)
*Solution Attempt:*
**New Yield for Baa-rated bonds:**
8% + 1.1% = 9.1%
**New Yield for Aa-rated bonds:**
6% + 1.1% = 7.1%
The confidence index formula is:
\[ \text{Confidence Index} = \frac{\text{Yield of Aa-rated bonds}}{\text{Yield of Baa-rated bonds}} \]
\[ \text{Confidence Index} = \frac{7.1\%}{9.1\%} \]
\[ \text{Confidence Index} = 0.780 \]
*Given Response:*
```plaintext
Confidence index: 0.282 ✗
```
*Feedback:*
✗ Answer is complete but not entirely correct.
Confidence Index = 0.228
---
Note: If you are getting a different answer, ensure you are correctly applying the formula and recalculating with precise values.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff1fd60a6-e122-44a6-b63f-53f11d7f8fb8%2F027812cd-6cfb-4aef-acbe-fd80d8251965%2F8mbsxzq_processed.png&w=3840&q=75)
Transcribed Image Text:**Example Problem on Calculating the Confidence Index**
*Problem Statement:*
Baa-rated bonds currently yield 8%, while Aa-rated bonds yield 6%. Suppose that due to an increase in the expected inflation rate, the yields on both bonds increase by 1.1%.
a. Calculate the new confidence index. (Round your answer to 3 decimal places.)
*Solution Attempt:*
**New Yield for Baa-rated bonds:**
8% + 1.1% = 9.1%
**New Yield for Aa-rated bonds:**
6% + 1.1% = 7.1%
The confidence index formula is:
\[ \text{Confidence Index} = \frac{\text{Yield of Aa-rated bonds}}{\text{Yield of Baa-rated bonds}} \]
\[ \text{Confidence Index} = \frac{7.1\%}{9.1\%} \]
\[ \text{Confidence Index} = 0.780 \]
*Given Response:*
```plaintext
Confidence index: 0.282 ✗
```
*Feedback:*
✗ Answer is complete but not entirely correct.
Confidence Index = 0.228
---
Note: If you are getting a different answer, ensure you are correctly applying the formula and recalculating with precise values.
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