Problem set 2 - 1 People are less likely to purchase houses because neither an increase of 5 percent in the mortgage interest rates nor a 5 percent

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1. People are less likely to purchase houses because neither an increase of 5 percent in the mortgage interest rates nor a 5 percent increase in housing prices provides enough incentive to purchase. These people would be spending too much money for what they were getting. 2. No, although the bonds themselves were low risk, a portfolio full of all the same bonds causes an inverse effect. In order for a portfolio to be low risk it must also be diversified (assets with returns not all moving at the same time). 3. Interest rate will fall because with the increase of stock prices is associated with the increase in bond prices and since the two are inversely related the interests rates will fall. 4. As a result the bonds probably became less liquid because now more people are likely to purchase junk bonds because of their supposed high yield but because it is so risky and now more and more people want them, they may not be able to pay everyone back at maturity. 5.
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This note was uploaded on 02/15/2010 for the course ECO 001 taught by Professor Gunter during the Fall '06 term at Lehigh University .

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Problem set 2 - 1 People are less likely to purchase houses because neither an increase of 5 percent in the mortgage interest rates nor a 5 percent

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