The National Bank unexpectedly increases the base rate by 2% (200 basis points), which cause an immediate 75 basis point YTM increase of the mid- and long-term maturity bonds. What is the expectation how the equity market will behave and why? Please provide a long and detailed answer <3
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The National Bank unexpectedly increases the base rate by 2% (200 basis points), which cause an immediate 75 basis point YTM increase of the mid- and long-term maturity bonds. What is the expectation how the equity market will behave and why?
Please provide a long and detailed answer <3
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- round the following information: Government bonds: \table [[Maturity, Yield], [1,1% round the following information: Government bonds: Maturity Yield 1 1% 2 2.2% 3 3% 4 5% BB Bonds: Maturity Yield 1 6% 2 8% 3 11% 4 17% Draw the credit spread curve. If you know that the market is assuming a constant recovery rate for all maturities, What must be their assumption for the probability of default?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.Q1 (a) Explain FOUR (4) reasons that influence the changes which make debt securityyields vary. (b) If a government bond is expected to mature in two years and has a current priceof RM950, calculate the bond's interest rate/yield if it has a par value of RM1,000and a promised coupon payment rate of 10%.(c) From part (b) above, illustrate how the bond price/value if the interest rate/yieldmoves up (increase).
- 7. A. Define duration and explain how duration is used in the management of a portfolio of financial securities. B. Why is duration a better measurement of interest rate risk than the time it takes to reduce the principal balance on a loan by 50%? C. How does maturity and yield affect the sensitivity of a financial security to changes in interest rates?Suppose that y is the yield on a perpetual government bond that pays interest at the rate of $1 per annum. Assume that y is expressed with simply com- pounding, that interest is paid annually on the bond, and that y follows the process dy = a(y0 −y)dt + oydWt, where a, y0, and o are positive constants and dWt is a Wiener process. (a) What is the process followed by the bond price? (b) What is the expected instantaneous return (including interest and capital gains) to the holder of the bond?Answer number 1 and 2: 1.) Suppose the yield on a 10-year T-bond is currently 5.05% and that on a 10-year Treasury Inflation Protected Security (TIPS) is 2.15%. Suppose further that the MRP on a 10-year T-bond is 0.90%, that no MRP is required on a TIPS, and that no liquidity premium is required on any T-bond. Given this information, what is the expected rate of inflation over the next 10 years? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. 2.) Koy Corporation's 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Koy's bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t − 1) × 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on Koy's bonds?
- 1. Consider two bonds with a similar credit rating and pay the same coupon rate per annum. The terms to maturity for Bond A and Bond B are 5 years and 10 years respectively. If inflation rate is expected to increase in the near future and therefore leads to an increase in interest rate, what is the effect on the bond prices? Which bond is likely to experience a larger effect due to the increase in interest rate? Briefly explain your answer.I (Interest rates) 1. Consider a bank account paying interest rate R2 = 4% with semi-annual compounding frequency. What is the equivalent rate R1 with yearly compounding frequency? What is the equivalent rate Rc with continuous compounding? 2. Explain briefly (in words) what are the potential pitfalls of using the Internal Rate of Return (IRR) for the evaluation of investment projects. 3. Consider the following two bonds: bond (A) is a zero-coupon bond with maturity TA and duration DA = TA; bond (B) is a coupon bond with maturity TB > TA and duration DB = TA. Which of the two bonds has a greater convexity? (Justify your answer.)Suppose that the current one-year rate (one-year spot rate) and expected one-year government bonds over years 2, 3 and 4 are as follows: 1R1 = 4.80%, E(2r1) = 5.45%, E(3r1) = 5.95%, E(4r1) = 6.10% Assume that there are no liquidity premiums. To the nearest basis point, what is the current rate for the four-year-maturity government bond? 5.57% 5.62% 5.83% 6.10%
- 6. Pure expectations theory The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates. Based on the pure expectations theory, is the following statement true or false? The pure expectations theory assumes that investors do not consider long-term bonds to be riskier than short-term bonds. True False The yield on a one-year Treasury security is 4.6900%, and the two-year Treasury security has a 6.3315% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) 10.1585% 7.9988% 6.799% 9.1186% Recall that on a one-year Treasury security the yield is 4.6900% and 6.3315% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year…Consider the effect of an un-anticipated 1 basis point increase in the 5 year bond rate (xt) at time t, which persists at t+1, t+2, . Assuming the 2 year bond rate (zt) 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 (yt) in the long run (i.e., infinite horizon)? O a. The 10 year bond rate increases by 1.34 in the long-run. Ob. · The long-run change in the 10 year bond rate is between 1.2263 and 1.4537 with 95% confidence. C. The 10 year bond rate is not significantly affected by the increase in the 5 year bond rate. d. The effect cannot be computed because the data is not stationary.3. Use the data in the following table on Treasury securities of different maturities to solve this problem: 1 year 2 year Зуеar 1.25% 2% 2.50% Assume that the liquidity premium theory is correct. On this day, what did investors expect the interest rate to be on the one-year Treasury bill two years from that time if the term premium on a two-year Treasury note was 0.20%, and the term premium on a three-year Treasury note was 0.40%?