Principles Of Economics, Student Value Edition
12th Edition
ISBN: 9780134079288
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: Prentice Hall
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Chapter 25.A, Problem 1P
To determine
To explain the differences’ interest rates.
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Students have asked these similar questions
The table below shows interest rates on 10-year bonds for a sample of American countries (Source:
Bloomberg, 08/2018). What factors explain why the rate for a 10-year bond is higher in Brazil and
Mexico than US and Canada?
10-Year Government Bond Yields
COUNTRY
United States
Canada
Brazil
Mexico
YIELD
2.88%
2.30%
11.81%
7.77%
A higher default risk for Brazil and Mexico and lower expected inflation in US and Canada.
A lower default risk for Brazil and Mexico and lower expected inflation in US and Canada.
A higher default risk for Brazil and Mexico and higher expected inflation in US and Canada.
A lower default risk for Brazil and Mexico and higher expected inflation in US and Canada.
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.
One-Year Bond
Rate
2.00%
3.00%
6.00%
7.00%
8.00%
31 =
141 =
151 =
The liquidity premiums for each year are given as: (Enter your responses rounded to two decimal places.)
11 = 0%
¹21 =
%
1%
1%
Year
1
2
%
3
4
5
Multiyear Bond Rate
2.00%
4.00%
6.00%
9.00%
12.00%
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 25 Solutions
Principles Of Economics, Student Value Edition
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