Question

Using the following data on bond yields:

	This Year		Last Year
Yield on top-rated corporate bonds	4.6	%	7.6	%
Yield on intermediate-grade corporate bonds	6.6	%	9.6	%

a. Calculate the confidence index this year and last year. (Round your answers to 4 decimal places.)

b. Is the confidence index increasing or decreasing?

• Increasing

• Decreasing

Answer 1

Answer:

The Confidence Index also termed as Barron's Confidence Index is a ratio to calculate investors desire to assume additional risk during investment. It is calculated by taking the ratio of the yield-to-maturity of top graded bond to the yield-to-maturity of its Intermediate grade bonds.

	This Year	Last Year
Yield on top-rated corporate bonds	4.60%	7.60%
Yield on intermediate-grade corporate bonds	6.60%	9.60%

a) This Year Confidence Index
= 4.60%/6.60%
= 0.6970

Last Year Confidence Index
= 7.60%/9.60%
= 0.7917

b) The Confidence Index has decreased from 0.7917 to 0.6970. Therefore, the Confidence Index is decreasing.