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- M7What will happen to the price of bonds, quantity of bonds and interest rate if bonds become riskier than stocks and the government starts spending more than their tax revenue? Show this on a graph.„Explain what happens to the bond price and interest rate and why. i) 11) i1) Expected inflation increases The return on other assets rises relative to bond 111 Government deficit increases
- 7. Zero-coupon bonds are the best way for high-income taxpayers to extract maximum value from tax-exempt state and local government bonds because: a.Zero-coupon bonds are sold for nearly their full face value and provide most of their income in the form of interest. b.Zero-coupon bonds allow the investor to make additional tax-exempt investments. c.The interest earned on the accumulated principal and interest is not tax-exempt. d.The investments pay interest continually. e.Zero-coupon bonds include more transaction fees.The Federal Reserve decided to buy bonds in order to bring the economy back to full employment. This must mean that the Federal Reserve believes that the full employment level of output is a not enough information b below 1 million c exactly 1 million d above 1 million1.Explain what happens to the bond price and interest rate and why. Expected inflation increases The return on bonds rises relative to other assets The federal government deficit increases i) ii)
- 17. Which of the following statements is true about bonds in the US? A) State and local governments have no default risk on their bonds. B) Bonds issued by the state and local governments are referred to as municipal bonds. C) All bonds issued by state, local, and federal governments are exempt from federal income tax. D) Local government bond coupons are usually higher than Treasury bonds coupons. 18. Under normal economic conditions, the yield curve is A) gently upward sloping. B) mound shaped. C) flats. D) bowl-shaped. 19. The main assumption in the segmented market theory is that bonds have different maturities A) are not substitutes for each other. B) is a perfect substitution. C) is substitutes only if the investor is given a premium incentive. D) is substitutes but not a perfect substitution.All other things being equal, which of the following would cause interest rates to rise? a. The economy slides into a recession. b. The federal government's budget deficit declines. c. The rate of inflation decreases. d. The Federal Reserve contracts the money supply.Refer to Table 12.2. a. What is the historical real return on long-term government bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the historical real return on long-term corporate bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) TABLE 12.2 Average Annual Returns: 1926-2019 Investment Average Return Large-company stocks 12.1% Small-company stocks 16.3 Long-term corporate bonds 6.4 Long-term government bonds 6.0 U.S. Treasury bills 3.4 Inflation 2.9 Source: 2020 SBBI Yearbook. Duff & Phelps.
- A4)Accounting for Fair Value Hedge: Interest Rate Swap On January 1 of Year 1, Innovative Lab issued a 4-year $50,000 note to a local bank with fixed interest payments based on 6%, payable annually on December 31. To hedge the risk of a fixed interest payment, Innovative Lab entered into a 4-year interest rate swap agreement on January 1 of Year 1, calling for interest payments tied to a designated benchmark interest rate to a counterparty and receipt of interest based on 6%, negotiated at a notional amount of $50,000. The settlement date for the net cash payment is on December 31 of each year. The following table provides additional information related to the interest rate swap as forecasted over the next 4 years. Fair value: Interest rate swap Fair value: note payable Benchmark interest rate Required Dec. 31, Year 1 Dec. 31, Year 2 Dec. 31, Year 3 Dec. 31, Year 4 $200 $0 $50,200 4.2% $400 $50,400 4.0% $0 $50,000 5.2% $50,000 5.8% a. Record the required journal entries for Year 1, Year…If inflation unexpectedly rises by 3%, would a corporation that had recently borrowed money by issuing fixed-rate bonds to pay for a new investment benefit or lose?