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Q1:
“If the bonds of different maturities are perfectly substituted, their interest rates are more likely to move together”. Is this statement true or false or uncertain? Discuss using the theory of expectation.
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- Question 6 (6 points): Hedge March 15th: A packer needs to buy Live Cattle in early June. Currently the June Live Cattle (LC) futures are trading at $175.650/cwt. The expected basis is $1.50/cwt. • Does the packer have a long or short cash position?. • Does the packer have a long or short futures position? (buy/sell) June LC futures at • • To hedge: The packer will $175.650/cwt. What is the expected price? June 10th. • The packer must. (buy/sell) cattle locally in the cash market at • $185.025/cwt. To offset their future position, they must $183.00/cwt. What is the actual basis? What is the realized price for the producer? o Method 1: o Method 2: ○ The hedge resulted in a realized price of (buy/sell) June futures at5. Suppose that asset returns satisfy this Euler equation: 1 E,0.96(1+r) C2 1 C1 where r denotes the real return from period 1 to period 2 and C is real consumption in the world. Suppose that C1 with probability 0.5. = 1 and that C2 can take on two values, 1.00 and 1.04, each (a) Solve for the world real interest rate, on a one-period, real, discount bond that is free of default risk. (b) Now suppose there is inflation, with Pı interest rate on a one-period, nominal discount bond that is free of default risk. = 1 and P, = 1.04. Solve for the nominal (c) Now imagine an emerging market debt issuer, whose nominal discount bonds pay 1 with probability 1 – A and 0.8 with probability A. Will this debt have a higher expected, real return than the asset you studied above?Consider a bond without an expiration date that makes a fixed interest payment of $210 per year. Complete the following table by calculating the interest rate on the bond at different sale prices. (Hint: The effective interest rate on a bond is a ratio of the interest payment to the sale price of the bond times 100.) Price of Bond Interest Rate (Dollars) (Percent) 1,200 1,000 750 600 Use the blue points (circle symbol) and the preceding table to plot the relationship between bond prices and interest rates on the following graph. Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically. The line showing the relationship between bond prices and interest rates has a _____(POSITIVE/NEGATIVE) slope; in other words, there is _______(INVERSE / A DIRECT) relationship between bond prices and interest rates. NOTE- THIS QUESTION IS DIVIDED INTO SUBPARTS . PLEASE ANSWER…
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- “According to the expectations theory of the term structure, it is better to invest in one-year bonds, reinvestedover two years, than to invest in a two-year bond if interest rates on one-year bonds are expected to be the samein both years.” Is this statement true, false, or uncertain?Please explain whole parts on paper please!!According to the portfolio theroies of money deman , which of the following statement is true? an increase in the epected rate of inlfation increases the deman for money an increase in the real return of stock increases the demand of the money a decrease in wealth increase the deman for money a decrease in the real return on bonds increases the demand for money
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