QUESTION 6. The expected yield on 1-year bonds over the next 5 years is 2.0%, 2.1%, 2.6%, 3.0%, and 3.8%. The current liquidity premium is 0.25% 1. Using the Expectations Theory of term structure, calculate the yield on a 5-year bond today. 2. Using the Liquidity Premium Theory, calculate the yield on a 5-year bond today.
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- 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.A9. Assuming that the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five years, and plot the resulting yield curves for the following paths of one- year interest rates over the next five years: a. 5%, 6%, 7%, 6%, 5% b. 5%, 4%, 3%, 4%, 5%. c. How would your yield curves change if people preferred shorter-term bonds over longer- term bonds?1. When the yield curve is flat or downward-sloping, it suggest that the economy is more likely to enter a recession. Why? Explain your answer. 2. Using bond demand and supply analysis, explain how each of the following events wouldaffect the interest rates. Include correctly labeled diagrams in explaining your answers.a. Government budget surplusb. Decrease in volatility of stock prices
- The figure provides the yield spreads of the long-term corporate bonds versus U.S. treasury bonds. Choose ONE wrong explanation for the increase in the spread during 2009.108.) If a General Motors bond brings a 7% annual return, the nominal return on a US Treasury bond that is not inflation indexed is 4%, and the real interest rate is 2%, what is the expected annual inflation rate and default risk on General Motors bond, respectively? 2%, 3% 2%, 2% 4%, 1% 3%, 4%The table below shows current and expected future one-year interest rates, as well as current interest rates on multiyear bonds. Use the table to calculate the liquidity premium for each multiyear bond. Year One-Year Bond Rate Multiyear Bond Rate 1 2.00% 2.00% 2 3.00% 3.00% 3 6.00% 5.00% 4 7.00% 7.00% 5 10.00% 8.00% The liquidity premiums for each year are given as: (Enter your responses rounded to two decimal places.) l Subscript 11 = (enter your response here)% l Subscript 21 = (enter your response here)% l Subscript 31 = (enter your response here)% l Subscript 41 = (enter your response here)% l Subscript 51 = (enter your response here)%
- A shift in the demand curve for bonds occurs when the quantity demanded changes at each given interest rate. When a shift takes place, there will be a new equilibrium value for the interest rate. Explain how expected returns result in a shift in the demand for bonds.(1) Suppose you just bought a treasury bill for $965 that matures in three months (91 days), and has a face value of $1,000. What is your bond’s current discount yield? What is your bond’s current investment yield? ANS: (2) The French Government runs a budget surplus to finance its expenditure. Use the loanable funds model to show what happens to the interest rate, investments, and the quantity of loanable funds. ANS: (3) Which of the following is money? An American Express traveler’s check Checking deposits at Washington Mutual bank. The check you have just written to pay for school fees. ANS: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.
- i. When interest rates __________, the market required rates of return ________, and the bond prices will ________. j. If interest rates increase after a bond issue, the yield-to-maturity will ______,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?Question: Using the model of demand and supply for bonds, explain the low-interest rate phenomena in Japan. Illustrate your answers with 2 diagrams.