Question

What would we see happen to the bond price and interest rates now, if people expected that the FED was going to raise the interest rate in the near future? Also, why would that be the case?

Answer #1

When new bonds are issued, they typically carry coupon rates at or close to the prevailing market interest rate. The interest rates and bond prices have an inverse relationship, so when one goes up, the other goes down. If the market interest rate rise, then the price of the bond with the 2% coupon rate will fall more than that of the bond with the 4% coupon rate.

In 1997, the Congress gave the Federal Reserve two main tasks: Keep the prices of things Americans buy stable and create labor market conditions that provide jobs for all the people who want them.

The FED has developed a toolkit to achieve these goals of inflation and maximum employment, But interest rate changes make the most headlines, perhaps because they have a swift effect on how much we pay for credit cards and other short term loans. The FED adjusts interest rates to spur all sorts of other changes in the economy. If it wants to encourage consumers to borrow so spending can be increase, which should help the economy, it cuts rates and makes borrowing cheap. To do the opposite and cool the economy, it raises rates so than an extra credit card seems less and less desirable.

FED often adjusts rates in response to inflation. Th FED's preferred measure of inflation last touched its 2% target in 2012. So the FED"S can't exactly argue that its rising rates to fight inflation, although it expects prices to rise.

FED basically adjusts interest rates that bank charge to borrow from one another, a cost that is passed on to consumers. The FED raises rates in a strong economy to keep excesses in check, and cuts borrowing costs when the economy needs support.

Imagine a bond that promises to make
coupon payment of $100 one year from now and $100 two years from
now, and to repay the principal of $1000 3 years from now. Assume
also that the market interest rate is 8 percent per year, and that
no perceived risk is associated with the bond.
Compute the present value of this bond
Suppose the bond is being offered for $1100 would you buy the
bond at that price? What do you...

What would be the impact of higher expected future interest
rates on today's price of bonds and interest rate? Use the
portfolio choice theory to answer this question.

When FED announces to increase interest rates? What should
happen to stock market portfolio price?
1. Price should drop.
2. Price should Increase.
3. Price should drop by a magnitude closer to the drop seen in a
20-year zero-coupon bond than to that in a 1-year bond.
4. Price increase because expected return increases.
1, 3
1
2
2, 4

30) When FED announces to increase interest rates? What should
happen to stock market portfolio price? 1. Price should drop. 2.
Price should Increase. 3. Price should drop by a magnitude closer
to the drop seen in a 20-year zero-coupon bond than to that in a
1-year bond. 4. Price increase because expected return
increases.
1, 3
2, 4
2
1

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...

If there is only one interest rate, why do we see multiple
interest rates in the real world? Please type for me. Thank
you.

We have discussed how to calculate the yield to maturity for a
fixed-payment loan. Now, we can applied the process to find the
interest for a bond. Consider a $1,000-face-value bond with 5 years
to maturity and yearly coupon payments of $100, which means you
will receive $100 every year for the next five years and $1,000 at
maturity. Suppose the price for this bond is$1,000.
A. Calculate the interest (yield to maturity) for this bond. You
need to write...

(a) What will happen to the price of bond and interest rate when
there is:
(i) an excess supply of bonds?
(ii) an excess demand for bonds?
Use diagrams to aid your
explanation.
(b) (i) Why does the segmented market theory suggest the bonds
of different maturities are not substitutes?
(ii) How does the segmented market theory
explain the upward sloping curve? ( 7 marks)

Over time, a _______ bond will see its price ______ if interest
rates do not change.
A.
par, decrease
B.
par, increase
C.
discount, decrease
D.
premium, increase
E.
discount, increase

What would happen if all psychological research stopped; no one
was allowed to study anything that has to do with the human
psyche?What field of psychology do you think helped the most
people? Why do you think this?Where do you see the future of
psychological research going?

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