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Q1:
“If the bonds of different maturities are perfectly substituted, their interest rates are more likely to move together”. Is this statement true or false or uncertain? Discuss using the theory of expectation.
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- Suppose you observe that short-term interest rates are higher than long-term interest rates. a. What expectations must people have regarding future interest rates? b. Why might the above relationship signal a recession? Why might it not? c. What will the yield curve for this problem look like? Q4 Why is the fact that stock prices follow a random walk a signal of stock market efficiency? What would have to be true if stock prices did not follow a random walk?If inflation rises, why is a bond more likely to be sold at a discount to its face value?Explain, with reference to the bond’s coupon.“According to the expectations theory of the term structure, it is better to invest in one-year bonds, reinvestedover two years, than to invest in a two-year bond if interest rates on one-year bonds are expected to be the samein both years.” Is this statement true, false, or uncertain?
- Economics Consider an investor based in the DC that invests in the FC. To hedge the FX risk the DC investor could (select all that are true) O Write a call option DC to FC at today's spot FX rate O Purchase a put option DC to FC at today's spot FX O Exercise a futures contract DC to FC at the date of the investment return trip O Engage in a swap for FC at the investment's open date to DC at the invesment's close date O Engage in a forward DC to FC, if counter-party risk is negligible O Purchase a futrues contract FC to DC for the return tripSuppose Maria prefers to buy a bond with a 7%expected return and 2% standard deviation of itsexpected return, while Jennifer prefers to buy a bondwith a 4% expected return and 1% standard deviationof its expected return. Can you tell if Maria is more orless risk-averse than Jennifer?prove that bond yields and bond prices are inversely related?
- Consider an investor based in the FC that invests in the DC. To hedge the FX risk the FC investor could (select all that are true): A. Engage in a swap for DC at the investment's open date to FC at the invesment's close date B. Engage in a forward DC to FC with an unnknown counter party and no escrow (margin) C. Write a call option FC to DC at today's spot FX rate D. Write a put option FC to DC at today's spot FX E. Exercise a futures contract DC to FC at the date of the investment return trip F. Purchase a futrues contract FC to DC for the return trip Detailed Explanation Please, Thank you!Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 14%. According to the capital asset pricing model: a. What is the expected return on the market portfolio?b. What would be the expected return on a zero-beta stock?c. Suppose you consider buying a share of stock at a price of $30. The stock is expected to pay a dividend of $4 next year and to sell then for $31. The stock risk has been evaluated at β = -0.5. Is the stock overpriced or underpriced?Investors view an increase in the default risk of corporate bonds, relative to US Treasury bonds. Consequently, in the market for bonds the yield on US Treasury bonds while the yield on corporate bonds increases; increases increases; decreases decreases; increases decreases; decreases
- You are an investor currently holding 1.5 million U.S. dollars, and you are contemplating the following strategies. 1)Investing in the U.S. 5-year treasury bonds.2)Investing in the 5-year government bonds of one of the countries listed below. Your strategy is to exchange your funds on the spot market into the foreign currency, buy the local government bond, and after the bond’s maturity, exercise a forward to change your funds back into USD. Spot and forward rates are listed below. There are no put and call rates (the spread is equal to zero). The forward, however, costs 2% of the exchanged value.Required:1.Find the most profitable strategy. Calculate the future and present values of all 11 strategies (U.S. treasury bonds and 10 foreign government bonds).2.Explore the concept of arbitrage on the currency exchange markets and critically evaluate how it relates to this situation.Identify and explain the three theories of the term structure of interest rates, including anyrelevant assumptions.The Security Market Line (SML) for the United States is shown on the graph below. Suppose that the interest rate for short-term government bonds in Japan is 1.5 percent, and that research shows that investors in the Japanese market tend to be more risk averse than investors in the U.S. market. Instructions: Use the tool provided 'SML, Japan' to draw the Security Market Line for Japan. Plot only the endpoints of the line. Average expected rate of return (%) 8.0 999655544MONNITO S5055OSOSOSOSOSO 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 SML USA SML Risk level (beta) JAPAN 0.5 0 0.250.50 0.751.00 1.251.50 1.752.00 SMLJAPAN Tools SML JAPAN BX