Homework 3

Homework 3 - Shweta Rana RU ID 126002060 Homework 3 Since...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Shweta Rana RU ID 126002060 Homework 3 1. Since the C rating is risker than Baa, it will have a higher interest rate. Because of the riski- ness of the bond, there will be a lower price and the high interest rate compensates for the risk. 2. U.S. Treasury bills have lower interest rates than large-denomination negotiable bank CDs be- cause the T-bills have less risk in defaulting and are more liquid. People will demand T-bills more and a low interest rate, thus more supply. 3. As the economy enters a recession, expected default rates will be higher because the risk premium on corporate bonds will increase. When the economy is booming, companies are ex- pected to do well and expected default rates will be lower. 4. This is true because the expected returns on bonds won’t be that different either. 5. If yield curves were flat, the risk premium on long term bonds would equal zero and people would be more willing to accept the pure expectations theory. 6. A. 1 year bond -- 5%. 2 year bond -- 6%. 3 year bond -- 6.33%. 4 year bond -- 6.5%. Five year bond -- 6.6%. If people preferred shorter-term bonds over longer-term bonds, the upward-sloping yield curve would be steeper because long-term bonds would have a positive liquidity premium. B. 1 year bond -- 5%. 2 year bond -- 4.5%. 3 year bond -- 4.33%. 4 year bond -- 4.25%. 5 year bond -- 4.2%. If people preferred shorter-term bonds over longer-term bonds, the downward- sloping yield curve would be less steep and if the long-term bonds have a positive liquidity premium, there might be a slight positive upward sloping. 7. A. 1 year bond -- 5.5%. 2 year bond -- 7%. 3 year bond -- 6%. 4 year bond -- 6%. Five year bond -- 5.8% B. 1 year bond -- 5%. 2 year bond -- 4.5%. 3 year bond -- 4%. 4 year bond -- 4%. 5 year bond -- 4.2%.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/23/2011 for the course ECON 301 taught by Professor Hassan during the Spring '08 term at Rutgers.

Page1 / 3

Homework 3 - Shweta Rana RU ID 126002060 Homework 3 Since...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online