Consider two bonds: X and Y. Ceteris paribus, we would expect the yield on Bond X to be greater than the yield on Bond Y ifthe two bonds have identical characteristics except that:Select one:O a. Bond Y was issued by a corporation you consider to be financially strong; whereas Bond X was issued by a financiallyweak corporation.O b. Bond Y was issued by a country currently experiencing a financial crisis associated with a disastrous war; whereasBond X was issued by the U.S. Treasury.O c. Bond Y was issued by a corporation in a country currently experiencing inflation of 3 percent per annum; whereasBond X was issued by a country experiencing inflation of 1 percent per annum.d. None of the above is correct. In each scenario Bond X would be the lower-yielding bond.

The bond yield depends on the demand for the bond, the higher bond demand causes the decline in the…

Answered: Consider two bonds: X and Y. Ceteris…

Consider two bonds: X and Y. Ceteris paribus, we would expect the yield on Bond X to be greater than the yield on B the two bonds have identical characteristics except that: Select one:

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter17: Financial Markets

Section: Chapter Questions

Problem 1SCQ: Answer these three questions about early-stage corporate finance: Why do very small companies tend...

See similar textbooks

Related questions

Q: Use the information below to answer the remainder of the quiz. Consider the market for a 3-year…

A: Hi Student, Thanks for posting this question. As per the guideline we are providing answer for the…

Q: Identify and explain the three theories of the term structure of interest rates, including any…

A: Introduction The link between short-term and long-term market interest rates is referred to as…

Q: Which of the following is NOT a primary factor that influences the shape of the yield curve? a.…

A: The yield curve can be defined as a curve that shows how the yield on bond instruments - such as…

Q: Which of the following apply to bonds? Select all that apply. Earn gains from dividends Earn gains…

A: In the mentioned question we have been asked about the details of what Bond is.

Q: If it gets easier to use gold to pay in stores, then: Bond demand will increase. Bond demand…

A: Disclaimer: Since you have asked multiple questions, I am providing you with the answer to the first…

Q: Your retirement portfolio comprises 100 shares of the Standard & Poor's 500 fund (SPY) and 100…

A: *Answer:

Q: Evaluate the following instruments as a tool to hedge portfolio income 1. Interest rate future 2.…

A: 1) Interest rate futures (IRF) help in supporting hedging because of loan fee hazards. Changes in…

Q: The interest rate for a bond is always equal to its yield to maturity

A: The interest rate can be defined as the amount of interest which is measured as a percentage of the…

Q: If the quantity of bonds demanded exceeds the quantity of bonds supplied, bond prices: a. Will rise…

A: If the quantity of bonds demanded exceeds the quantity of bonds supplied, bond prices would rise and…

Q: An economist has estimated that, near the point of equilibrium, the demand curve and supply curve…

A: Equilibrium is the state where the quantity demanded is equal to the quantity supplied in the market…

Q: What happens to the equilibrium price of bonds if the supply of bonds shifts leftward? A. Bond…

A: The equilibrium is a state in which economic forces like supply and demand are balanced and the…

Q: The bond rating agencies(choose right answer) a:used outdated computer modeling software and…

A: When talking about bonds rating agencies, these are the institution that make analysis of different…

Q: Explain the nature of the credit risks to a financial institution in a swap agreement.

A: A swap is a financial arrangement between two parties to exchange financial instruments, cashflows,…

Q: 1. What does the following yield curve tell us? Treasury yield curve for January 20, 2006. Maturity…

A: An yield curve is the one that represents interest rate paid at different different maturity…

Q: Economic analysis is generally viewed as an integral part of the top-down approach to security…

A: Top-down investing is a speculation investigation approach that examines first the full-scale…

Q: Why do bonds trade at prices different than par

A: Bond:- A bond is regarded as a definite-income asset because it pays bondholders a guaranteed return…

Q: Yield Curve 10.0% 6.7% 1.0% 1 4 Problem 2 Consider the yield curve above. Suppose the (expected)…

Q: Explain why you would be more or less willing to buy long-term Delta Air Lines bonds under the…

A: Since you have posted a question with multiple sub-parts, we will solve the first three subparts for…

Q: How do interest rates affect bond yield and bond prices.

A: Bonds are a form of financial security in case of which the issuer owes the holder a debt. Borrowers…

Q: Interest rate risk refers to changes in the bond's ___________ (coupon rate, credir rating, par…

A: Interest rate risk is defined as the reduction or increase in the market value of the bond due to a…

Q: You will be LESS likely to buy bonds if: Stock prices become more volatile. You expect interest…

A: Individual investors seeking pay or the conservation of capital regularly consider adding bonds to…

Q: Using the model of demand and supply for bonds, explain the low-interest rate phenomena in Japan.…

Q: Investors view an increase in the default risk of corporate bonds, relative to US Treasury bonds.…

A: A corporate bond may be a sort of debt security that is issued by a firm and sold to investors. the…

Q: Give two specific examples of "wealth," which may lead to the increase in the demand for bonds,…

A: Answer -

Q: If the quantity of bonds demanded exceeds the quantity of bonds supplied, bond prices: Answer a.…

A: The quantity of bond demanded and supplied depends upon the price of the stock or bond. When the…

Q: If there is a decreased demand for a financial asset. its yield will rise its current purchase price…

A: Demand for bonds shows that there exists an inverse relationship between the price of the bond and…

Q: When interest rates __________, the market required rates of return ________, and the bond prices…

A: When interest rates rise, the market required rate of returns fall, and the bond price will fall.…

Q: Define and discuss the portfolio-balance effect in terms of Quantitative Easing and its impact on…

A: Portfolio-balance effect According to the portfolio-balance hypothesis, the interest rate adjusts…

Q: Evaluate ways to manage interest rate risk with forward rate agreements, futures and swaps

A: Interest rate risk exists in an interest-bearing asset, such as a loan or a bond, because interest…

Q: Why are bond prices and interest rates inversely related?

A: please find the answer below.

Q: Draw the supply and demand curves for the bond and explain what will happen to the equilibrium price…

A: “Since you have posted a question with multiple sub-parts, we will solve first three subparts for…

Q: True or False: With a discount bond, the return on thebond is equal to the rate of capital gain.

A: Financial economics deals with all the instruments which are used in several markets for speculative…

Q: Explain what the term "bond price elasticity" means. Would bond price elasticity indicate that…

A: * ANSWER :-

Q: he demand curve and supply curve for a No-year discount bond with a face value f $2,420 are…

A: The demand curve shows the inverse relationship between price and quantity demanded. The demand…

Q: prove that bond yields and bond prices are inversely related?

A: Bonds basically refers to the financial instruments in which an investor lends money to a business…

Q: Jane, who works for the economic research department in a multinational corporation, is preparing a…

A: The income elasticity of demand shows the responsiveness of quantity demanded due to change in…

Q: According to the portfolio theroies of money deman , which of the following statement is true? an…

A: According to Portfolio theories of money demand, an individual's wealth is held in the form of money…

Q: If I am looking to purchase a bond, assuming all other factors are equal, which of the following…

A: The markets are considered to be the places where the interaction of the buyers, and sellers takes…

Q: If the current price of a bond is greater than its face value: A) There is no right answer. B) the…

A: The interest rate of bond and price of yield have an inverse relationship exist between. The rise in…

Q: Below you will find the Demand and Supply Curves for $250,000 bonds that mature in 18 years: Qd =…

A: Equilibrium is: Qd=Qs400,000-2P=3P-100,000P=100,000

Q: Explain how will the following transactions affect Bangladeshi NCO? Does this transaction affect…

A: In an open economy, net capital outflow refers to the total amount of cash that goes outside the…

Q: Suppose everyone expects investment to rise sharply in three months. How would this expectation be…

A: The bonds are the income-generating assets in the economy. The bonds are issued by those…

Q: Which of the following is a true statement? Multiple Choice ___ If interest rates fall, U.S.…

A: Interest rate and bonds value have inverse relation with each other. When the interest rate rises,…

Q: Suppose Yakov would like to use $8,000 of his savings to make a financial investment. One way of…

A: Bonds refer to high-security debt instruments that enable an entity to raise funds and fulfil…

Q: A key use of interest-rate swaps is to: Answer a. Earn the fees for constructing the swaps b.…

A: An interest rate swap is a forward agreement wherein, based on a fixed principal sum, one source of…

Q: Inflationary expectations in the economy increase rapidly, evoking a much stronger response from…

A: Demand for bonds shows that there exists an inverse relationship between interest rate and quantity…

Question

100%

Consider two bonds: X and Y. Ceteris paribus, we would expect the yield on Bond X to be greater than the yield on Bond Y if
the two bonds have identical characteristics except that:
Select one:
O a. Bond Y was issued by a corporation you consider to be financially strong; whereas Bond X was issued by a financially
weak corporation.
O b. Bond Y was issued by a country currently experiencing a financial crisis associated with a disastrous war; whereas
Bond X was issued by the U.S. Treasury.
O c. Bond Y was issued by a corporation in a country currently experiencing inflation of 3 percent per annum; whereas
Bond X was issued by a country experiencing inflation of 1 percent per annum.
d. None of the above is correct. In each scenario Bond X would be the lower-yielding bond.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Definition

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

QUESTION 12 The US authorities have proposed the following rate as a replacement for LIBOR: O a. LIBOR, Jr. O b. Secured Overnight Financing Rate O c. Standard Overnight Federal Rule O d. Syracuse Interbank Offering Rate O e. None of the Above QUESTION 13 A bond denominated in euros and issued by an Italian company in the US is classified as: O a. Eurobond Ob. Domestic Bond Oc. Foreign Bond O d. Italian Bond O e. Bondo Italiano QUESTION 14 The existence of overvalued currencies in foreign exchange markets principally supports the following hypothesis of foreign direct investment: O a. Government-Imposed Distortions O b. Market Structure O c. Market disequilibrium O d. Market equilibrium O e. Product Life Cycle
In the Loanable Funds Market Model, ceteris paribus, it typically follows that when the federal government runs a budget deficit, there will be préssure on interest rates and pressure on private investment. This is referred to as Select one: O a. upward; upward; crowding out Ob. upward; downward; crowding out O c. downward; downward; financial intermediation Od. downward; upward; financial intermediation.
What caused the downturn, and eventual dissolution, of Long-Term Capital Management LP.? The 1997 Russian default caused a significant rise in U.S. Treasury Bonds, which LTCM was significantly short selling. O With the fall of the Soviet Union, Russia invested in the U.S. markets and destabilized the economy temporarily. O LTCM did not investments in Russian markets when they defaulted on their debts. OLTCM was lying to investors in an effort to inflate their stocks, which they then used to pay their employees in stock options.
O If the market interest rate (i) increases today, the Price of a Bond (P) today will decline. The following are correct statements about the impact of Market Interest Rate (i*) on value and return of a typical Coupon Bond, EXCEPT: The YTM of a Bond and the Market Interest Rate (i*) are the same value, even in the Short Term. O For a long term bond, if the Market Interest rate (i*) is expected to increase, the current Price of such Bond will Decline. For a two period Bond, if the Market Interest rate (i*) is expected to increase in the next period, the Expected Total Return (RET) on such bond will decline. Long Term Bonds are considered more risky than Short Term bonds, in part due to the risk associated to changes in future interest rates.
Bond rating agencies like Moody's and Fitch specialize in: OA assessing the credit and default risk of issuers. O B. assessing the credit, default and liquidity risk of issuers. OC. assessing the liquidity risk of issuers. O D. guaranteeing a specific interest rate payment by bond issuers to investors.
5. Economists continue to be puzzled by the appar- ent home bias of investors across countries. With mean-variance preferences, investors ought to allo- cate much more of their wealth to foreign equities and bonds. Three explanations for the phenomenon are given below, all of them based on empirical facts. For each one, discuss whether the statements are true or false and in what sense they help, or fail, to rationalize the home bias puzzle. In answering the questions, assume that investors have mean- variance preferences. a. Investors should not hold foreign equities be- cause they are more volatile and have been yielding lower returns than U.S. stocks in re- cent years. b. Home bias arises because investors face an ad- ditional risk when investing internationally— namely, currency risk. Because currency risk makes returns more volatile but does not lead to a higher expected return, investing more in domestic…
Suppose that in a given bond market, there is currentlyno information that can help potential bond buyers todistinguish between bonds. Which bond issuers havean incentive to disclose information about their companies? Explain why
2. 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?
Suppose that, holding yield constant, investors are indifferent as to whether they hold bonds issued by the federal govemment or bonds issued by state and local governments (that is, they consider the bonds the same with respect to default risk, information costs, and liquidity) Suppose that state governments have issued perpetuities (or consoles) with $78 coupons and that the federal govemment has also issued perpetuities with $78 coupons. If the state and federal perpetuites both have after-tax yields of 8%, what are their pre-tax yields? (Assume that the relevant federal income tax rate is 31.13%) * The pre-tax yield on the state perpetuity will be______________% * The pre-tax yield on the federal perpetuity will be_______________%
One main assumption underlying the segmented markets theory is that: O A. Markets for different maturity bonds are not completely separate. O B. Markets for different maturity bonds are completely separate. O C. Bonds of different maturities are substitutes. O D. All of the listed options are incorrect.
Question 4Every country, including Canada and the US, has used foreign borrowing to industrialize and develop its economy. These long-term loans are classified as foreign direct investment (FDI) and portfolio investment. Explain fully the difference between these two types of loans, including implications for risk and sovereignty. Provide examples of each type. Explain as fully as possible how short-term capital flows are different from long-term capital flows. Give examples of each. For your long-term examples try to use different examples, such as real estate, than those you provided for short-term capital flows.
Answer these three questions about early-stage corporate finance: Why do very small companies tend to raise money from private investors instead of through an IPO? Why do small, young companies often prefer an IPO to borrowing from a bank or issuing bonds? Who has better information about whether a small firm is likely to earn profits, a venture capitalist or a potential bondholder, and why?