Principles of Macroeconomics (12th Edition)
12th Edition
ISBN: 9780134078809
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 10.A, Problem 1P
To determine
To explain the differences’ interest rates.
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The main impact of quantitative easing on the economy is that it
1, pushes long-term interest rates down and encourages investors to purchase more risky assets like shares, which can encourage more business investment and consumer spending.
2, pushes long term interest rates up and encourages investors to purchase more risky assets like shares, which can encourage more business investment and consumer spending
3, pushes long term interest rates up and encourage investors to purchase more risky assets like shares, which can encourage more business investment and consumer spending
4, encourages banks to increase their lending, as explained by the money multiplier
5, involves the provision of free money to private banks.
Using your knowledge of the term structure of interest rates, demonstrate that the assertion “the interest rate on a long-term bond will equal an average of the short-term interest rates that people expect to occur over the life of the long-term bond ” holds.
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…
Chapter 10 Solutions
Principles of Macroeconomics (12th Edition)
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Similar questions
Calculate the bond yield rate (%) for a bond with an annual interest payment of $200 and a market price of $9,000.
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Concerning the behavior of interest rates,
With the help of a graph show and briefly explain what happens to interest rates during times of an economic boom.
With the help of a graph, show and briefly explain what happens to interest rates during times of higher expected inflation.
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If the price of a government bond (gilt) traded on the stock market rises above its nominal value, which of the following statement must be true?
1 -The bond's coupon falls below the yield
2 - The bond's coupon rises above the yield
3-the bond's yield rises above the coupon
4 - the bond's yield falls below the coupon
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13. Stock quotes - Looking up a stock price
The price of a stock is largely influenced by supply and demand. When more people want to buy a stock, the price goes _______ . By contrast, when more people want to sell a stock, the price goes_________ .
You can look up the current price for a stock, and other important numerical measures, by searching for the company (or the stock’s trading symbol) on popular financial or investing websites. Many newspapers also publish abbreviated information in the financial section for many common stocks, bonds, and mutual funds.
The following table represents the format of typical price quotes for various stocks that would appear in the financial section of a newspaper:
YTD
52 WEEKS
YLD
VOL
NET
% CHG
HI
LO
STOCK (SYM)
DIV
%
PE
100S
LAST
CNG
+9.25
56.31
39.04
Global Communications
GC
0.36
0.72
23.17
58093
50.06
+1.82
+18.87
48.57
36.55
GermCorp
GERM
0.14
0.30
20.48
8134
47.05…
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A bond has a Macaulay duration of
10.00
and is priced to yield
8.0%.
If interest rates go up so that the yield goes to
8.5%,
what will be the percentage change in the price of the bond? Now, if the yield on this bond goes down to
7.5%,
what will be the bond's percentage change in price? Comment on your findings.
If interest rates go up to
8.5%,
the percentage change in the price of the bond is
nothing%.
(Round to two decimal places.)
If interest rates go down to
7.5%,
the percentage change in the price of the bond is
nothing%.
(Round to two decimal places.)
Comment on your findings. (Select the best answer below.)
A.
As interest rates decrease, the price of the bond decreases. As interest rates increase, the price of the bond increases.
B.
As interest rates increase or decrease, the price of the bond will always increase.
C.
As interest rates increase or decrease, the price of the bond remains the same.
D.
As interest rates…
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7. Determinants of market interest rates
Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic:
Characteristic
Component
Symbol
This is the premium that reflects the risk associated with changes in interest rates for a long-term security.
It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people’s time preferences for consumption.
This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value.
It is calculated by adding the inflation premium to r*.
Over the past several years, Germany, Japan, and Switzerland have had lower interest rates than the United States due to lower values of this premium.
It is based on the bond’s rating; the higher the…
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On January 2, Burt asked Logan to loan him money “against my diamond ring.” Logan agreed to do so. To guard against intervening liens, Logan received permission to file a financing statement, and Burt and Logan signed a security agreement giving Logan an interest in the ring. Burt also signed a financing statement, which Logan properly filed on January 3. On January 4, Burt borrowed money from Tillo, pledging his ring to secure the debt. Tillo took possession of the ring and paid Burt the money on the same day. The next day, January 5, Logan loaned Burt the money under the assumption that Burt still had the ring. Who has priority, Logan or Tillo? Explain.
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If the current interest rate increases, what will happen to the interest rate and price of previously issued bonds?Interest Rate; Price
Interest rate decrease; price decrease
Interest rate decrease; price increase
Interest rate increase; price increase
Interest rate increase; price decrease
Interest rate constant; price decrease
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when the inflation rate is expected to increase, the real cost of borrowing ______ at any given interest rate; the supply of bonds _____ and the supply curve shifts to the _____.
is either rise or decline
increase or decrease
left or right
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Suppose that the yield curve shows that the one-year bond yield is 3 percent, the two-year yield is 4 percent, and the three-year yield is 5 percent. Assume that the risk premium on the one-year bond is zero, the risk premium on the two-year bond is 1 percent, and the risk premium on the three-year bond is 2 percent. What are the expected one-year interest rates next year and the following year?
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Consider the following hypothetical investment for the fund. Issue a one-month liability and purchase a $1,000, 15-year, 5% coupon Treasury bond. Assume that the one-month interest rate is currently 2% and that the 15-year interest rate is currently 5%. How much in liabilities would the fund have to issue to finance the purchase of the Treasury bond? At the end of one year the fund has received the coupon-interest payment on the bond and paid interest on its short-term liabilities. What is the net earnings for the fund for that year? What is the value of the bond investment at the end of the year (there are 14 years to maturity remaining on the bond) assuming that the long-term rate is still 5%? What is the net asset value (market value of assets minus liabilities) of the fund?
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During the global financial crisis from 2007 to 2008, government bond interest rate declines from 5% to 0%, while corporate bond interest rate increases from 7% to 10%. Use bonds market equilibrium to graphically show and discuss how would government bond interest rate and corporate bond interest rate change if financial risk becomes higher
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