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Question 1 1). When the central bank raises the interest rates, then generally a. bond prices...

Question 1

1). When the central bank raises the interest rates, then generally

a. bond prices increase and stock prices decrease

b. bond prices decrease and stock prices increase

c. bond prices and stock prices tend to decrease

d. bond prices and stock prices tend to increase

P.S. is the correct answer "c" option? pls explain.

2). Which of the following must be true regarding the bond described by the cash flow stream (-100, 5, 105)? (select all that apply)

a. the yeild on the bond is 5%

b. the bond is trading at par

c. the coupon rate is 5%

d. it is equivalent to the bond (-50, 3, 53)

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Answer #1

Answer 1:- Option (c):- bond prices and stock prices tend to decrease

Explanation:-

  • There is an inverse relationship between bond prices and interest rates which means as interest rates rise, bond prices fall, and vice versa. This is because if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond which results in a decline in the price of the bond
  • There is an inverse relationship between stock prices and interest rates, which is because rising rates could slow down the economy, which would negatively affect stocks. This is because higher interest rates mean higher borrowing costs for individuals and businesses which lead to lower consumer and business spending.

Answer 2:-

a. the yield on the bond is 5%

b. the bond is trading at par

c. the coupon rate is 5%

Explanation:- All the options given in (a), (b), (c) are correct and are true regarding the bond described by the cash flow
stream (‐100, 5, 105)

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