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4.2 You have just won $10 million , $1 every year for the next 10 years. Discuss. 4.6 What is the yield to maturity of a $1,000 face value discount bond that matures in 1 year and sells for $800? What if it matured in 2 years?.
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4.2 You have just won $10 million , $1 every year for the next 10 years. Discuss.
4.6 What is the yield to maturity of a $1,000 face value discount bond that matures in 1 year and sells for $800? What if it matured in 2 years?
4.12 If there is a decline in interest rates, which would you rather be holding, long-term bonds or short-term bonds? Which type of bond has greater interest rate risk?
4.19 Interest rates were lower in the mid-1980s than they were in the late 1970s,
Yet many economists say that real interest rates were actually much higher
in the mid-1980s. Does this make sense?
P down i up
i = r + πe
Demand and Supply of Money
Shifts in the Supply of Money
But Ms up also increases output and prices
Since i= r + πe, if π and πecatches up as it must, i too
Since (M/P)d = L(Y,i) is stable at each Y, (M/P)smust fall when π . P must rise faster than M.
5.6 An important way in which the Fed decreases Msis by selling bonds to the public. Using a supply and demand analysis for bonds, show the effect on i.
Using the liquidity preference framework, show the effect on i.
5.17. The Chairman of the Fed announces that interest rates will fall and stay low next year. What will happen to corporate bond interest rates today? Explain.
There are two great powers in the world, the US and Moody’s. The US can destroy
you by dropping bombs. Moody’s can destroy you by dropping your credit rating.
Yield curve—a plot of the yield on bonds with differing terms to maturity but the same risk, liquidity and tax considerations
Expectations Theory of Term StructureBonds with same tax, risk and liquidity are substitutesExplain the yields of bonds of different durations
Bonds of different maturities are substitutes but not perfect
Reading the tea leaves: http://stockcharts.com/charts/YieldCurve.html
6.3 Why are corporate bond yields countercyclical?
6.5 If yield curves on average were flat, what would this say about term premiums? Would this support expectations theory?
6.6 Plot the yield curve when current and expected one-year interest rates are (a) 5%,7%,7%,7%,7%; (b) 5%,4%,4%,4%,4%
Now suppose these are current one-year, two-year, …, rates. What one-year rates are expected in future years?
6.9 Make sense of this yield curve