QUESTION 5Consider the effect of an un-anticipated 1 basis point increase in the 5 year bond rate (xt) at timet, which persists at t+1, t+2, ... . Assuming the 2 year bond rate (zt) does notchange, and no other shocks occur at any horizon, what is the most appropriate inference regarding the change in the 10 year bond rate (yt) in the long run (i.e., infinite horizon)?O a. The 10 year bond rate increases by 1.34 in the long-run.O D. The long-run change in the 10 year bond rate is between 1.2263 and 1.4537 with 95% confidence.O C. The 10 year bond rate is not significantly affected by the increase in the 5 year bond rate.O d. The effect cannot be computed because the data is not stationary.

Consider the effect of an un-anticipated 1 basis point increase in the 5 year bond rate (x+) at time t, which persists at t+1, t+2,... Assuming the 2 year bond rate (z+) does not change, and no other shocks occur at any horizon, what is the most appropriate inference regarding the change in the 10 year bond rate (y+) in the long run (i.e., infinite horizon)? O a. The 10 year bond rate increases by 1.34 in the long-run. O b. The long-run change in the 10 year bond rate is between 1.2263 and 1.4537 with 95% confidence. O C. The 10 year bond rate is not significantly affected by the increase in the 5 year bond rate. Od. The effect cannot be computed because the data is not stationary.

Consider the effect of an un-anticipated 1 basis point increase in the 5 year bond rate (x+) at time t, which persists at t+1, t+2,... Assuming the 2 year bond rate (z+) does not change, and no other shocks occur at any horizon, what is the most appropriate inference regarding the change in the 10 year bond rate (y+) in the long run (i.e., infinite horizon)? O a. The 10 year bond rate increases by 1.34 in the long-run. O b. The long-run change in the 10 year bond rate is between 1.2263 and 1.4537 with 95% confidence. O C. The 10 year bond rate is not significantly affected by the increase in the 5 year bond rate. Od. The effect cannot be computed because the data is not stationary.

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

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1. Assume the following information about a Treasury zero-coupon yield curve today: Maturity (years) Zero rates (%) Maturity (years) Zero rates (%) 1 2.30 6 3.50 2.70 7. 3.80 3. 2.90 8 4.00 4 3.10 9 4.20 3.20 10 4.30 All rates above are with continuous compounding. a. Calculate the corresponding rates under semi-annual compounding. b. Calculate the price of a 4-year Treasury bond with face value $1,000 that pays coupon annually at the coupon rate of 4%. c. If the government wants to issue a 5-year bond that pays coupon annually and priced at par (face value $1,000), what should be the amount of each coupon payment?
Give typing answer with explanation and conclusion Consider the prevailing condition of inflation (including changes in global oil price), the economy, budget deficit, decreases in expected remittance inflow, and the central bank monetary policy that could affect interest rate. Based on the prevailing conditions do you think bond price will increase or decreases in next six-month period. In the real economic environment which other factors may affect the bond price? Which factor in your opinion will have biggest impact on bond price? Assess the above given situations.
The interest rate changes to i' in the second period. Evaluate the rates of return when you sell the bond after one period in the case of the change being (i) anticipated (ii) unanticipated. ? [P'
The value of any financial asset is the present ✓ value of the cash flows the asset is expected to produce. For a bond with fixed annual coupons, its value is equal to the present value of all its annual interest payments and its maturity value as shown in the equation below: Bond's value = VB: Int. Int. (1+ra)² (1+ra)² N + ·+...+ Int. M + (1+ra)* (1+ra) Int. M (1+ra) (1+ra)N + We could use the valuation equation shown above to solve for a bond's value; however, it is more efficient to use a financial calculator. Simply enter N as years to maturity, I/YR as the going annual interest rate, PMT as the annual coupon payment (calculated as the annual coupon interest rate times the face value of the bond), and FV as the stated maturity value. Once those inputs are entered in your financial calculator, you can solve for PV, the value of the bond. Remember that the signs for PMT and FV should be the same, so PV will have an opposite sign. Typically, you would enter PMT and FV as positive…
It is given that dP/dt = rP (r being the annually compounded interest rate and P is the amount in the account at any given time). Suppose that an account earns at an annual rate of r percent compounded continuously and a person is drawing an income of H dollars per year withdrawn continuously (impossible, but a modeling assumption). Use phase line analysis to analyze the behavior of the account. Discuss the meaning of any equilibrium points and their stability. If r = 10% (a reasonable rate for long-term stock investments), and H = $10,000, how long should an initial investment of $50,000 be left untouched so that when withdrawals begin the capital is not depleted?
2
why the increases in bond price are larger than the decreases in terms of dollars for the same change (say, 1% change) in the market interest rate
Which of the following statements is the most accurate? 43. a. Long-term cash flows are riskier than short-term cash flows.Furthermore, a 20-year bond that is callable after 5 years would have a shorter projected duration, if not none at all, than a noncallable 20-year bond with equal maturity. As a result, if all other features are equal, investors can demand a lower rate of return on the callable bond than on the noncallable bond. b. A noncallable 20-year bond would have an average life that is equivalent to or better than a callable 20-year bond with otherwise similar characteristics. Furthermore, the longer a bond's lifespan, the higher the interest rate danger it poses to buyers. As a result, while all other factors remain stable, callable bonds subject borrowers to fewer interest rate risk than noncallable bonds. c. Both a and b are right statements. d. None of the above claims are true.
A4)
5
Assume that inflation is expected to rise soon. How could this affect future bond prices? Would you recommend that financial institutions increase or decrease their concentration in long-term bonds based on this expectation?
Please solve this practice problem

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