Using both the supply and demand for bonds and liquidity preference frameworks, show how interest rates are affected when the riskiness of bonds decreases. Are the results the same in the two frameworks

Using both the supply and demand for bonds and liquidity preference frameworks, show how interest rates are affected when the riskiness of bonds decreases. Are the results the same in the two frameworks

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter31: Capital Markets

Section: Chapter Questions

Problem 6E

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1. Using both the supply and demand for bonds and liquidity preference frameworks, show how interest rates are affected when the riskiness of bonds decreases. Are the results the same in the two frameworks?

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Why are bonds somewhat risky to buy, even though they make predetermined payments based on a fixed rate of interest?
If interest rates decline, which would you rather beholding, long-term bonds or short-term bonds? Why?Which type of bond has the greater interest-rate risk?
11. Interest rate risk is lower for bonds than treasury bills with the same tenor. Is this true or false? Why?
Stock prices fell throughout much of 2007 and 2008 and many investors decided to switch their funds into the bond market. What only about 30 percent of surveyed investors knew was that as bond prices rise, interest rates a. fall in reaction to the decreased demand for bonds. b. rise in reaction to the increased demand for bonds. c. fall in reaction to the increased demand for bonds. d. rise in reaction to the decreased demand for bonds.
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Why is the relationship between price and yield negative?a. Because investors reward higher cash-flows with a lower price.b. Because governments regulation prohibits a positive relationship.c. Because an increase in the yield discounts cash flows at a higher rate and so their netpresent value decreases.d. Because cash flows are variable over a bond’s life.
3. Draw and label the bond market graph covered in chapter 5. Then, using the graph, illustrate how the equilibrium price, yield to maturity, and quantity changes as a result of:a. An increase in expected inflation. Explain the movement from one equilibrium to another.b. A decrease in riskiness of bonds. Explain the movement from one equilibrium to another.c. An increase in the profitability of business investment. Explain the movement from one equilibrium to another.Use a different graph for each one and clearly label the axis and the shifting of curves. Explain clearly (in words and on the graph) whether the price and yield to maturity increased or decreased.
24)To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S. Congress used two government-sponsored enterprises (GSEs) called, ________. The GSEs role was to sell bonds to investors and use the funds to purchase mortgages from _______. Select one: a. the Fed and the Treasury Department; Households b. the Fed and Treasury Department; Banks c. Fannie Mae and Freddie Mac; Households d. Fannie Mae and Freddie Mac; Banks e. Fannie Mae and Freddie Mac; Investment Banks
5. What happened with the demand and supply of bonds in Japan some 20 years ago when interest rates of Japanese bonds turned negative? Please explain in words and by completing the figure. Price of bonds Quantity of bonds
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