AnnuityThe market forces in financial markets are determining that all asset yields (interest rates) are equal to 5% a year. A government bond issued today pays $10,000 a year for each of the next three years, and therefore, the price ofthe bond today is approximately $27,232.50. Suppose that you are the governor of the Reserve Bank of Australia and you want to reduce the interest rate to 2% implementing yield-curve control policy. What would you do?a. Buy 50% of the stock of bonds.b.Buy any quantity of bonds at $28,286.34 per bond.c. Increase the supply of 3-year government bonds to reduce the price of the bonds.d. Buy any quantity of bonds at the prevailing price.Sell any quantity of bonds at $28,838.83 per bond.

This approach involves the central bank (Reserve Bank of Australia) issuing more bonds to increase…

Answered: Annuity The market forces in financial…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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11. If a yield curve looks like the one shown in the figure below, what is the market predicting about the movement of future short-term interest rates? What might the yield curve indicate about the market's predictions for the inflation rate in the future? Yield to Maturity Term to Maturity
Refer to the table below to answer one question. Option Cash Checking accounts 6-month CD 10-year Treasury bond Corporate bond (Aaa) Interest Rate March 2020 % 0.00% 0.01% 1.70% 0.88% 2.67% What is the implied price of holding money in a checking account rather than investing in Treasury bonds? Instructions: Enter your response as a percentage rounded to two decimal places.
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% 5.00% 8.00% 11.00% 13.00% The liquidity premiums for each year are given as: (Enter your responses rounded to two decimal places.) 131 = = 151 = % % % % Year 1 2345 2 Multiyear Bond Rate 2.00% 5.00% 6.00% 8.00% 10.00%
During the global financial crisis from 2007 to 2008, government bond interest rate declines from 5% to 0%, while corporate bond interest rate increases from 7% to 10%. Use bonds market equilibrium to graphically show and discuss how would government bond interest rate and corporate bond interest rate change if financial risk becomes higher
Bond A pays $8,000 in 28 years. Bond B pays $8,000 in 14 years. (To keep things simple, assume these are zero-coupon bonds, which means the $8,000 is the only payment the bondholder receives.) Suppose the interest rate is 5 percent. Using the rule of 70, the value of Bond A is approximately Now suppose the interest rate increases to 10 percent. Using the rule of 70, the value of Bond A is now approximately I The value of a bond rate. and the value of Bond B is approximately and the value of Bond B is approximately Comparing each bond's value at 5 percent versus 10 percent, Bond A's value decreases by a when the interest rate increases, and bonds with a longer time to maturity are percentage than Bond B's value. sensitive to changes in the interest
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 % % %
Currently a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%. What is the risk premium of an A-rated ten-year corporate bond with a yield of 5.5%? 0.5% 5.5% 0.8% 1.17%
In regards to Modern Theories of Interest Rates and Their Application to the Caribbean Region, what is the concept of the yield curve and its relevance in economic activities in the Caribbean?
What does it mean to say that a bond has a value less than one for its relative yield differential? What might account for such a difference?
The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, and two years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of £)as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantity demanded/supplied at this interest rate? What happens to the demand/supply of the bond as the interest rate increases? Explain why. c) What is the equilibrium interest rate? d) Suppose that the bond trades at premium. Is there excess demand or supply? Explain. e) There is a business cycle contraction, so both supply and demand shifts. After the shift, the new demand curve is given by: D = 4000 + X − 2P , whereas the new supply curve is S = 2P + 200. For which values of X will the interest increase/decrease? Which values of X are in line with empirical data?
Suppose a new process was developed that could be used to make oil out of seawater. The equipment required is quite expensive, but it would in time lead to low prices for gasoline, electricity, and other types of energy. What effect would this have on interest rates? (Hint: which direction does demand curve shift? How does it change savings and investment in the economy?)
Inflationary expectations in the economy increase rapidly, evoking a much stronger response from issuers of bonds than borrowers of bonds. Using the model of supply and demand for bonds, illustrate and explain the impact of this increase in inflationary expectation on equilibrium bond price and interest rate.

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