HW _5 Answers

HW _5 Answers - ManEc 453 Money, Banking and Financial...

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ManEc 453 Money, Banking and Financial Markets Problem set #5 Due: October 12, 2011 1. Risk premiums on corporate bonds are usually anticyclical; that is, they decrease during business cycle-expansions and increase during recessions. Why is this so? Default risk is less when times are good. 2. Under what circumstances would purchasing a Treasury Inflation Protected Security (TIPS) from the US government be virtually risk free? Default Risk Hold a TIPS Bond to maturity and there is no Interest rate risk Default, Interest rate or inflation risk Inflation risk 3. explain what will happen to bond prices and interest rates if the government Governemt runs deficit Supply curve shifts right as Gov issues more bonds and Demand curve moves left as stocks doing better than bonds OR Demand curve moves right as people by more bonds b/c of wealth
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HW _5 Answers - ManEc 453 Money, Banking and Financial...

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