Anna Green thinks that the recent Federal Reserve policy is going to push the interest rates...
Anna Green thinks that the recent Federal Reserve policy is going to push the interest rates up. She is considering keeping only one of the three bonds in her portfolio. She knows that bond A has a duration of 5.234, bond B has a duration of 4.867, and bond C has the following characteristics:
Par Value 1,000
Life 5 years
Coupon Rate 5%
Discount rate 14 percent
Which one of the three bonds should she keep? Why? Explain.
Homework Answers
We have to calculate duration of Bond C as follows:
Coupon rate=1,000*5%=$50
| 1 | 2 | 3 | 4=2*3 | 5=2*4 |
| Year | Cash Flow | DF @ 14% | PV | Weighted average |
| 1 | 50 | 0.8772 | 43.8596 | 43.8596 |
| 2 | 50 | 0.7695 | 38.4734 | 76.9468 |
| 3 | 50 | 0.6750 | 33.7486 | 101.2457 |
| 4 | 50 | 0.5921 | 29.6040 | 118.4161 |
| 5 | 1050 | 0.5194 | 545.3371 | 2726.6855 |
| 691.0227 | 3067.1537 |
Duration=3067.1537/691.0227
=4.4386
Anna Green thinks interest rate may rise, which means bond price will fall if Federal Reserve Policy pushes the interest rate up. Which means that she should keep a bond having lowest duration so that the price fall is lowest for increase in interest rate.
Accordingly she should keep Bond C which has the lowest duration amonst the three bonds.
Add Answer to:
Anna Green thinks that the recent Federal Reserve policy is
going to push the interest rates...
In July 2019 the Federal Reserve lowered interest rates for the first time in a decade....
In July 2019 the Federal Reserve lowered interest rates for the first time in a decade. The Federal Reserve has two missions: to keep unemployment low and to keep inflation low. To reduce the unemployment rate, it cuts rates to increase the money supply and increase aggregate demand. To reduce inflation the Fed raises interest rates to decrease the money supply and tamp down aggregate demand. Right now the unemployment rate is at a 50-year low and inflation is below...
The Federal Reserve conducts monetary policy with a variety of goals in mind. Increasing the money...
The Federal Reserve conducts monetary policy with a variety of goals in mind. Increasing the money supply can help spur investment and boost production in the economy, and the most common ways of increasing the money supply are buying bonds off of the open market, or lowering the discount rate, making it cheaper to borrow for investment. However, doing this comes at a cost of inflation, because there are more dollars chasing goods than before. Recently, the Federal Reserve has...
Federal Reserve Chairman Jerome Powell announced the central bank will lower interest rates for the first...
Federal Reserve Chairman Jerome Powell announced the central bank will lower interest rates for the first time since the Great Recession in 2008 to help stave off the possibility of an economic downturn. Federal Reserve Chairman Jerome Powell announced the Fed will lower its target federal funds interest rate by 25 basis points to a range of 2.0% to 2.25%. Powell stated the Fed still viewed the outlook for the U.S. economy as favorable, but the interest rate cut is...
1. Describe the overall structure of the U.S. Federal Reserve System. Be sure to provide at...
1. Describe the overall structure of the U.S. Federal Reserve System. Be sure to provide at least 5 characteristics of the Fed in your response. An example of one of the many characteristics is that the Fed was created under the Federal Reserve Act of 1913. This is what I am looking for (simple and basic fact) but please do not use this one (1913) anymore........ Be creative on your own answers and be sure to elaborate on your answers...
Your financial advisor recommended that you buy some long bonds because she felt interest rates were...
Your financial advisor recommended that you buy some long bonds because she felt interest rates were going to decline. She pointed out that the price of those bonds would be more volatile than short bonds. She suggested $1000 par value, 40 year zero coupon bonds offered by a local utility selling at $372.43. She pointed out that the market rate of interest of 2.5% would be declining to 2% within the next 9 months based on her read of the...
9 In the U.S econormy the money supply is cot A) U.S Treasury. B) Federal Reserve...
9 In the U.S econormy the money supply is cot A) U.S Treasury. B) Federal Reserve System D) Senate Committee on Banking and Finance. 10. Ceteris paribus, if the Fed raised the required reserve ratio A) Banks could increase their lending B) The Federal funds interest rate would rise. The size of the monetary multiplier would decrease. D) The size of the monetary multiplier would increase. 11. Money is created when A) Loans are made. Checks written on one bank...
Julie Cupples 6.Julie Cupples is in the process of evaluating her portfolio. Help her answer the...
Julie Cupples 6.Julie Cupples is in the process of evaluating her portfolio. Help her answer the following questions: a.She is considering two bonds for addition to her portfolio. Bond A has a modified duration of 8.0. Bond B has a modified duration of 3.0. Julie expects interest rates to fall over the next three years. Based solely on this information (assume the investments have equivalent bond ratings), which bond should she purchase? b.Julie is currently in the 22 percent marginal...
We have seen that Federal Reserve Chairman Ben Bernanke has argued that low interest rates in...
We have seen that Federal Reserve Chairman Ben Bernanke has
argued that low interest rates in the United States during the
mid-2000s were due to a global savings glut rather than to Federal
Reserve policy. In an interview with Albert Hunt of Bloomberg
Television, Alan Greenspan, who was Federal Reserve Chairman from
August 1987 through January 2006 made a similar argument.
Greenspan argued, "Behind the low level of long-term rates: a
global savings glut as China, Russia and other emerging...
What are the three main tools the Federal Reserve (Fed) has at its disposal to carry out monetary policy? setting...
What are the three main tools the Federal Reserve (Fed) has at its disposal to carry out monetary policy? setting the discount rate, increasing taxes, and building highways conducting open market operations, increasing spending by the federal government, and decreasing taxes conducting open market operations, setting the discount rate, and paying interest on reserves O paying interest on reserves, conducting open market operations, and controlling money demand During the financial crisis of 2007-2008, the Fed engaged in lending to certain...
Show the time line and key steps of one method. 1. A new 8%, 5-year bond...
Show the time line and key steps of one method. 1. A new 8%, 5-year bond pays interest annually and yields 6% (YTM). If this YTM remains unchanged, calculate the price of this bond one year from now. If Megan has held this bond over one year, calculate the total return of her 1-year bond investment 2. A new 3-year, 6% annual-coupon bond was just issued. If the market interest rate is 8%, (a) calculate the duration of this bond,...
The Federal Reserve conducts monetary policy with a variety of goals in mind. Increasing the money supply can help spur investment and boost production in the economy, and the most common ways of increasing the money supply are buying bonds off of the open market, or lowering the discount rate, making it cheaper to borrow for investment. However, doing this comes at a cost of inflation, because there are more dollars chasing goods than before. Recently, the Federal Reserve has...
1. Describe the overall structure of the U.S. Federal Reserve System. Be sure to provide at least 5 characteristics of the Fed in your response. An example of one of the many characteristics is that the Fed was created under the Federal Reserve Act of 1913. This is what I am looking for (simple and basic fact) but please do not use this one (1913) anymore........ Be creative on your own answers and be sure to elaborate on your answers...
9 In the U.S econormy the money supply is cot A) U.S Treasury. B) Federal Reserve System D) Senate Committee on Banking and Finance. 10. Ceteris paribus, if the Fed raised the required reserve ratio A) Banks could increase their lending B) The Federal funds interest rate would rise. The size of the monetary multiplier would decrease. D) The size of the monetary multiplier would increase. 11. Money is created when A) Loans are made. Checks written on one bank...
We have seen that Federal Reserve Chairman Ben Bernanke has
argued that low interest rates in the United States during the
mid-2000s were due to a global savings glut rather than to Federal
Reserve policy. In an interview with Albert Hunt of Bloomberg
Television, Alan Greenspan, who was Federal Reserve Chairman from
August 1987 through January 2006 made a similar argument.
Greenspan argued, "Behind the low level of long-term rates: a
global savings glut as China, Russia and other emerging...
What are the three main tools the Federal Reserve (Fed) has at its disposal to carry out monetary policy? setting the discount rate, increasing taxes, and building highways conducting open market operations, increasing spending by the federal government, and decreasing taxes conducting open market operations, setting the discount rate, and paying interest on reserves O paying interest on reserves, conducting open market operations, and controlling money demand During the financial crisis of 2007-2008, the Fed engaged in lending to certain...
Show the time line and key steps of one method. 1. A new 8%, 5-year bond pays interest annually and yields 6% (YTM). If this YTM remains unchanged, calculate the price of this bond one year from now. If Megan has held this bond over one year, calculate the total return of her 1-year bond investment 2. A new 3-year, 6% annual-coupon bond was just issued. If the market interest rate is 8%, (a) calculate the duration of this bond,...
Most questions answered within 3 hours.
-
1a) According to the ideal gas law, _______________.
a. a gas has infinite volume at absolute...
asked 12 minutes ago -
Oakdale Fashions, Inc. had $245,000 in 2018 taxable income.
Using the tax schedule in Table 2.3...
asked 35 minutes ago -
The marketing class at CSUS had an average score of 150. An
educational analyst determined that...
asked 1 hour ago -
Justin Case has purchased a $250 000 home by putting 20 % down
and taking out...
asked 2 hours ago -
1. In a labor market, marginal cost for a firm is
____________.
a. recruiting cost
b....
asked 2 hours ago -
On January 1, 2019, ABC Company issued $60,000,000 of 20-year,
10.5% bonds when the market rate...
asked 3 hours ago -
39.4% of US homes continue to use a landline in addition to cell
phone service. 3...
asked 3 hours ago -
Starting with benzene, synthesize 1-phenyl-1-butyne.
Show intermediates and reagents.
asked 4 hours ago -
Create a 32-run crossed array design with six control factors
and two noise factors such that...
asked 5 hours ago -
A 500g sample of sand from source A has the following amounts
retained on each sieve....
asked 5 hours ago -
In
your own words, please explain the essay by John Keynes wrote "The
End of Laissez...
asked 5 hours ago -
How are the matrix and pixels related? Why are smaller
pixels better for diagnostic quality?
asked 5 hours ago