Question

Baa-rated bonds currently yield 6%, while Aa-rated bonds yield 5%. Suppose that due to an increase in the expected inflation rate, the yields on both bonds increase by 1% a. Calculate the new confidence index? (Round your answer to 3 decimal places.) Confidence index b. Would this be interpreted as bullish or bearish by a technical analyst? Bullish Bearish

Answer 1

Part a:

Answer: New confidence index=0.857
Confidence index=(Average yield for high grate bonds)/(Average yield for intermediate graded bonds)
Initial confidence index=5%/6%=0.8333
Due to increase in the yields, we have;
New confidence index=(5%+1%)/(6%+1%)=6%/7%=0.857142857 or 0.857 (Rounded to 3 decimal places)

Part b:
Answer: Bullish
The increase in the confidence index (from 0.8333 to 0.857) is interpreted as bullish.