Question

Suppose it is ‘breaking news’ that interest rates will fall by a fixed amount for the...

Suppose it is ‘breaking news’ that interest rates will fall by a fixed amount for the indefinite future. Prices for a 10-year bond will _________ by _________ than prices for a 2-year bond.

a. rise, less

b. rise, more

c. fall, less

d. fall, more

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Solution:

Answer-  b. rise, more

Explanation- The relation between interest rat and bond price is vice-versa. So, if interest rates fall the bond price will rise and if interest rates rise, bond price will fall. In this case interest rates fall, that means bond rate will rise. And we also know that the long maturity bond is more sensitive to change in the interest rates. So, for 10-year bond the price change will be more than for a 2-year bond. Therefore, suppose it is ‘breaking news’ that interest rates will fall by a fixed amount for the indefinite future. Prices for a 10-year bond will rise by more than prices for a 2-year bond.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1.Suppose that the interest rates paid on corporate bonds are currently 8%, but you expect them...
1.Suppose that the interest rates paid on corporate bonds are currently 8%, but you expect them to fall moderately in the near future. If your expectation is correct, buying bonds today would be wise because: (a)lower rates make bonds less risky. (b)stocks are a bad investment because their prices are likely to fall when rates fall. (c)falling rates will make the market value of the 8% bonds rise, giving you the potential to profit from capital gains. (d)these bonds are...
Q. You believe interest rates will soon fall. a. Would you rather own a three-year, 6...
Q. You believe interest rates will soon fall. a. Would you rather own a three-year, 6 percent coupon, fixed-rate bond or an equivalent-risk, three-year, floating-rate bond currently paying 6 percent interest? b. Would your answer to (a) change if you were contemplating issuing a bond rather than owning one? If so, how? c. Would your answer to (a) change if, as an investor, you believed interest rates would soon rise? If so, why? d. In the current market scenario with...
If interest rates are expected to increase in the near future, you are better off holding...
If interest rates are expected to increase in the near future, you are better off holding onto a long-term bond. A. False: Long-term bonds are never a good investment when the economy is growing normally. B. True: You'll gain more by owning long-term bonds when interest rates rise. C. False: You should hold onto shorter term bonds that are less subject to prices falling if interest rates rise. D. True: Short-term bonds are a very bad idea.
Suppose that China and the Oil Exporting countries announce that they will each sell 30% of...
Suppose that China and the Oil Exporting countries announce that they will each sell 30% of their investment in US government bonds. All other things equal, you would expect that: a. bond prices in the US would rise and the US interest rate would fall b. bond prices in the US would fall and US interest rates would rise. c. bond prices and interest rates would both decline d. bond prices and interest rates would both rise What is the...
True or false: If interest rates fall by 1%, a 10-year, 3% coupon bond will increase...
True or false: If interest rates fall by 1%, a 10-year, 3% coupon bond will increase in percentage of price less than an otherwise equivalent zero-coupon bond. The term structure of interest rates defines the relation between bond maturity and bond yield to maturity. Nominal interest rates tend to increase when the economy expands. A pension fund would probably prefer a municipal security with a yield of 2.5% to an equivalent corporate bond with a yield of 3%.
Suppose in the Wall Street Journal you see the following current (spot) interest rates for Treasury...
Suppose in the Wall Street Journal you see the following current (spot) interest rates for Treasury bonds with an upward sloping yield curve:                   5-year bond rate =1.45%; 10-year bond rate = 2.13%    a. Under the expectations theory, what is the expected 5-year bond rate (forward rate) 5 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why Expected 5-year bond rate 5 years from now = _________________ (Be sure to show your...
The value of a bond declines when market interest rates rise, because _____ a. the coupon...
The value of a bond declines when market interest rates rise, because _____ a. the coupon rate of the bond declines and the bond pays less interest _____ b. the coupon rate of the bond is fixed and the effective interest rate must equal the market _____ c. the company’s performance has improved, making the bond less risky. _____d. the amount of interest the bond pays increases, lowering the required rate of return.
Assume that all interest rates (i.e. discount rates) in the economy rise from 2% to 5%....
Assume that all interest rates (i.e. discount rates) in the economy rise from 2% to 5%. Which of the following bonds is the most sensitive to the change in interest rates? (Show the work leading to your answer) a. A 1-year bond with 10% coupon rate b. A 6-year bond with 5% coupon rate c. A 10-year zero-coupon bond d. A 20-year 5% coupon bond
The Fisher Effect refers to Select one: A. the value of bonds rising when interest rates...
The Fisher Effect refers to Select one: A. the value of bonds rising when interest rates fall. B. higher expected inflation changes both bond demand and supply. The shifts in demand and supply reinforce each other to result in higher nominal interest rates. C. higher interest rates on longer maturity financial instruments. D. higher expected inflation changes both bond demand and supply, but whether nominal interest rates rise or fall depends on which curve, demand or supply, shifts more.
Following an increase in money supply, if the interest rates fall immediately and then eventually rise...
Following an increase in money supply, if the interest rates fall immediately and then eventually rise higher than the original level, then : a. The liquidity effect is weaker than the income and price level effect and there is fast adjustment b. The liquidity effect is stronger than the income and price level effect c. The liquidity effect is weaker than the income and price level effect and there is slow adjustment d. The liquidity effect is stronger than the...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT