(1)
Higher risk of default decreases the demand for AIG bonds, shifting its demand curve to left, decreasing both their price and quantity. Bond price and interest rate are negatively related, so lower bond price will increase interest rate of AIG bonds.
In following graph, D0 and S0 are initial demand and supply curve for AIG bonds, intersecting at point A with initial price P0 and quantity Q0. As demand decreases, D0 shifts left to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.
(2)
If liquidity injection becomes successful in restoring investor confidence, the investors will start buying more AIG bonds, which will increase its demand, shifting demand curve rightward, increasing price of quantity of such bonds. Eventually, initial equilibrium point A in above graph will be reached. Bond price and interest rate are negatively related, so higher bond price will decrease interest rate of AIG bonds.
QUESTION 3: 4 POINTS (1) In the fall of 2008, AIG, the largest insurance company in...
QUESTION 3: 4 POINTS (1) In the fall of 2008, AIG, the largest insurance company in the world at the time, was at risk of defaulting due to the severity of the global financial crisis. How does higher risk of default affect demand for AIG corporate bonds and interest rates on AIG corporate bonds? (2 points) (2) As a result, the U.S. government stepped in to support AIG with large capital injections and an ownership stake. How would this affect,...
1. (a) If a corporation announces that it expects quarterly earnings to increase by 22 percent and it sees an increase of 25 percent, what should happen to the price of the corporation's stock if the efficient markets hypothesis holds, everything else held constant? (b) Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not? 2. (a) If the U.S....
increase or decrease
increase or decrease
rise or fall
rise or fall
Question 5 8 pts Group 2. Supply and Demand of Bonds Market and interest Rate determination 2. The outbreak of Corona virus sparked the greatest global recession since 2008-2009 Great Recession. Millions of worker lost their jobs during the pandemic crisis in the past two months. U.S. Senate passed $2.2 trillion relief bill to save the economic devastation. In the developing scenario, U.S. Bonds market will see alan)...
QUESTION 2: 4 POINTS Suppose initially, the interest rate on U.S. Treasury bonds is equal to that on bonds issued by Greek government. In 2010 and 2011, the government of Greece risked defaulting on its bonds due to a severe budget crisis. (1) Using bond market graphs, graphically show the effects on U.S. Treasury bonds and comparable-maturity Greek bonds. (2 points) Greek government bonds U.S. Treasury bonds (2) What is the impact on prices and interest rates of Greek bonds...
1. During the financial crisis of 2008, the prices of U.S. Treasury securities A) rose and the price of corporate bonds declined. B) fell relative to the prices of corporate bonds. C) remained in the same relative position to the prices of corporate bonds. D) were frozen by order of the federal government. 2. Which combination of assets represents the most diversification? A) holding corporate and Treasury bonds B) holding shares of Google and Yahoo C) holding shares of Google...
The choices for the blanks, in
order, are:
fall/rise
narrowing/widening
higher/lower
low/high
rise/fall
decreasing/increasing
Corporate-Bond Issuers Race to the Market as U.S. Yields Approach Record Low On April 25, 2011, the Fed announced that short-term interest rates would be kept near zero through late 2014. Because corporate bonds are indexed to Treasury yields and the Treasury yield hit nearly all-time lows, issuing conditions became conducive for investment-grade borrowers. Europe's debt crisis fueled the demand for relatively safer U.S. securities, and...
1. The key factor(s) in the 2008 financial crisis / housing bubble was Select one: a. Corporate greed b. Lack of regulation of the financial and housing sectors c. Low interest rates and federal intervention in the housing market d. High interest rates 2. According to the video Money for Nothing, which of the following was proposed regarding the post-2008 economic recovery? Select one: a. We may be passing through the "eye of the storm" b. The crisis is over...
1. Why is China still poor in per capita terms despite having the second-largest economy in the world in terms of real GDP? 2. What is the relationship between savings, capital formation, and consumption? 3. According to Malthus, how do economic growth and population relate to each other? 4. What are loanable funds? Discuss the factors affecting the (a) the demand for loanable funds, (b) the supply of loanable funds. 5. Explain how a consumption tax could lead to a...
More on types of bonds
1- You can distinguish the various types of
bonds by their terms of the contract, pledge of collateral, and so
on. Identify the type of bond based on each description given in
the table that follows: (Types of Bonds: Junior Mortgage
Bonds/ Debentures/ Subordinate Debentures/ Senior Mortgage
Bonds)
Description
Type of Bond
a) These bonds are collateralized securities with first claims
in the event of bankruptcy.
?
b) These bonds are not backed by any...
1) Explain liquidity risk, default risk, and taxability risk. How does each of these risks affect the yield of a bond? 2) Define what is meant by interest rate risk. Assume the manager of a $100 million portfolio of corporate bonds predicts interest rates will rise in the near future. What adjustments should be made to the portfolio assuming the market has not already adjusted for this prediction? 3) Normally, the Treasury yield curve is upward-sloping. Explain the conditions required...