Suppose that the market risk, or volatility, of stocks increases. Providing a graph of the demand and supply of bonds (you may draw the graph by hand), show the effect of this behavior on the equilibrium interest rate as a result. Name another variable other than in question 5, including the correct direction of change (i.e. increase or decrease) that would be described by the same graph

Suppose that the market risk, or volatility, of stocks increases. Providing a graph of the demand and supply of bonds (you may draw the graph by hand), show the effect of this behavior on the equilibrium interest rate as a result. Name another variable other than in question 5, including the correct direction of change (i.e. increase or decrease) that would be described by the same graph

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter31: Capital Markets

Section: Chapter Questions

Problem 8E

See similar textbooks

Similar questions

What are some reasons why the investment strategy of a 30-year-old might differ flow the investment strategy of a 65-year-old?
You have decided to invest in an open-end mutual fund. You are currently looking at a fund-Washington Premier Fund-in your newspaper. The fund is quoted as: Name NAV Net Chg YTD %RET 36.25 0.15 6.95 Assume that today's opening price of Washington Premier Fund equals yesterday's closing price. If you wanted to make your investment first thing this morning, then you should expect to pay for each share of since it Yesterday, each share of sold for $35.95 $43.50 $36.25 $34.44 $0.15 less $0.15 more $6.95 less $6.95 more If you had $8,000 available to invest, you could purchase than it did the day before, and offers a return of 294 368 assesses a 0.15% fee 276 shares of. is a no-load fund charges a 6.95% fee 221 Your evaluation of the Washington Premier Fund is made easier by the fact that: your investment choices are limited. mutual funds are careful to explicitly state their investment objectives. a mutual fund broker will select a customized mix for you. 0.15% 36.25% 6.95% for the year.
1. Suppose that people expect the one-year interest rate will equal 1% forever. a. Consider a ten-year zero coupon (discount) bond with a face value of $1000. The bond has a current price of $910. Is the term premium positive or negative? b. Redo question (a), assuming that the bond has a current price of $900. c. Using FRED, plot the behavior of the term premium on a 10-year zero coupon bond over the past 25 years in the US.
Suppose instead Larry decides to buy 100 shares of NanoSpeck stock. Which of the following statements are correct? Check all that apply. O C The price of his shares will rise if NanoSpeck issues additional shares of stock. NanoSpeck earns revenue when Larry purchases 100 shares, even if he purchases them from an existing shareholder. Expectations of a recession that will reduce economywide corporate profits will likely cause the value of Larry's shares to decline.
2. Assume a bond with the following characteristics: face value = $1000; maturity = 5 years; N yearly coupon payments = $100. a. If the current price of this bond is $850, state what the formula is to calculate the bond's yield to maturity and state the range of interest rates where the yield to maturity should fall b. If you purchased this bond at face value and held it for 1 year, when you resold it for $850, what is the bond's rate of return?
8 Do stock prices and interest rates tend to move in opposite or the same direction? Explain the basis for this.
Suppose that in a given bond market, there is currentlyno information that can help potential bond buyers todistinguish between bonds. Which bond issuers havean incentive to disclose information about their companies? Explain why
3. Discuss any three factors that determine Interest Rates?
Consider two firms (a) Firm A has profits twice as large as Firm B's profits. The firms do not differ in any other way. Which firm's stock should you buy if Firm A's stock price is PA = $50 and Firm B's stock price is PB = $30? What would you expect to happen to stock prices in equilibrium? Explain your answer (b) Suppose stock prices are in equilibrium. Explain what happens to the stock prices of these two firms if the interest rates increase? (c) Suppose stock prices are in equilibrium. Does the Efficient Market Hypothesis suggest to %3D buy one stock or the other stock? Explain.
A company in real estate sold a house about 200 years ago for $20. If they had invested this amount at an interest rate of 10 percent per year, 2. how much would they have today? The same company has an investment project that would cost $25 million today and yield a payoff of $30 million in 3 years. Should the firm undertake the project if the interest rate is 8 percent? 6 percent ? Can you figure out the exact cutoff for the interest rate between profitability and non profitability? 3. The same company has an investment project that would cost $25 million today how many years will take to yield a payoff of $30 million with 9.5%?
O If the market interest rate (i) increases today, the Price of a Bond (P) today will decline. The following are correct statements about the impact of Market Interest Rate (i*) on value and return of a typical Coupon Bond, EXCEPT: The YTM of a Bond and the Market Interest Rate (i*) are the same value, even in the Short Term. O For a long term bond, if the Market Interest rate (i*) is expected to increase, the current Price of such Bond will Decline. For a two period Bond, if the Market Interest rate (i*) is expected to increase in the next period, the Expected Total Return (RET) on such bond will decline. Long Term Bonds are considered more risky than Short Term bonds, in part due to the risk associated to changes in future interest rates.
. What are the various factors that affect the cost ofmoney and hence interest rates? How will changesin these components affect asset prices?