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- Question: Suppose that many big corporations decide not to issue bonds, since it is now too costly to comply with new financial market regulations. Can you describe the expected effect on interest rates? Illustrate your answer with a diagram.Suppose Ford Motor Company issues a five year bond with a face value of 5,000 that pays an annual coupon payment of $150. What is the interest rate Ford is paying on the borrowed funds? Suppose the market interest rate rises from 3 to 4 a year after Ford issues the bonds. Will the value of the bond increase or decrease?The remarkable thing about the events described in the article is that the yield an the 3-month T-bill was briefly negative. To see how this could haroen, consider the relationship between bond prices and bond yields. A 3-month T-bill with a maturity value of $1,000 is just a piece of paper that entities the holder to $1,000 in three months. For example, if you were to buy a 3-month T-bill on September 24, 2008, with a maturity value of $1,000 and 90 days left to maturity, the U.S. government would pay you $1.000 on December 23, 2008. In general, the price of a bond is less than its maturity value. That is, if you are going to give up a certain amount of money for the duration of the bond, you expect to be paid for this loss of liquidity and compensated for inflation that could reduce the value of the repayment at the end of the period. Therefore, a piece of paper entitling you to $1,000 on December 23 would usually be worth less than $1,000 on September 24. The yield on a bond is a…
- To determine how U.S. interest rates reacted to this announcement, use the FRED database at thelink referenced above and choose the weekly format. a.) Adjust the graph to see what happened to the interest rate in the week including May 16,1995. How does this movement in the interest rate compare with neighboring weeks,specifically the preceding week and the subsequent week? In your answer to thisquestion, please include a copy of the graph. b.) What type of retaliation by the government of Japan for the proposed tariff canexplain this change in interest rates? Explain why Japanese retaliation would result inthis change in interest rates. c.) About one month later, President Clinton announced that the two countries had reachedan agreement, which ended the threat of the tariffs being imposed. What happened to the interest rates during the month of June? In your answer to this question, pleaseinclude a copy of the graph. Please explain why averting a trade war would have thiseffect on the…In a country Macroland, the government borrows at 5% for 1-year maturity. However, the Central Bank has announced interest rate hikes for the following years, so people expect that the next year the same 1-year bond will pay 7% and that the interest will rise again to 8% in the year after. Compute and draw the yields curve (for 1, 2 and 3 years bonds) of the government of Macroland, assuming that there is no risk of default and no inflation2. 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?
- In country Macroland, the government borrows at 5% for 1-year maturity. However, the Central Bank has announced interest rate hikes for the following years, so people expect that the next year the same 1-year bond will pay 7% and that the interest will rise again to 8% in the year after. Compute and draw the yields curve (for 1, 2 and 3 years bonds) of the government of Macroland, assuming that there is no risk of default and no inflation and the Central Bank announcements are credible..Define current yieldRecently, the European Central Bank (ECU) has been worried about inflation and thus needs to make a decision about interest rates, and thus the resulting bond prices. Assume we are talking about Euron an Savings Bonds (ESB) and you are given the following information: The European Savings Bond (ESB) has no expiration date: The ESB price =$1,000 the ESB has a fixed annual interest payment =$10, ' e ESB annual interest rate =10 percent. If the price of the ESB increases to $5,000, the interest rate will Multiple Choice ◻ rise to 50 percent. ◻ fall to 4 percent. ◻ fall to 5 percent. ◻ rise to 12 percent. ◻ fall to 2 percent.
- . What are the various factors that affect the cost ofmoney and hence interest rates? How will changesin these components affect asset prices?. A well-known bank has specialized in adjustable-rate mortgages. They have originated 7 billion USD in adjustable-rate mortgages. This bank generally raises money by borrowing with shorter term loans and issuing fixed-interest rate Certificates of Deposit. The bank has 6 billion in short-term adjustable-rate loans to partly help fund the loan portfolio. The federal reserve has announced an increase in their target interest rate of 50 basis points (0.5%). What is the equation and solution.The bank wants to receive a fair value in t=0 of 100,--EUR for her risky bond. 1. Please briefly explain how the conditions of the issued bond have to be amended by the bank.
