Question

1. Discuss and elaborate the decision of investing in bond market based on the forecast of interest rate. What will you do if you expect long-term interest rate to increase in the near future? When will you prefer to invest in if you expect that the spread between corporate and government bonds to widen?

Answer 1

the best way to use bonds to predict the economy is to look at the yield curve. The “yield curve” is simply which is the yields on bonds of varying maturities (typically from three months to 30 years) plotted on a graph based on their yields. The yield curve typically slopes upward, since investors demand higher yields for longer-term bonds.

Since yields for bonds of all maturities change every day due to market fluctuations, the “shape” of the yield curve is always changing – and these changes provide insight into the economic outlook

If market interest rates rise, then the price of the bond with the 2% coupon rate will fall more than that of the bond with the 4% coupon rate. purchase bonds in a low-interest rate environment