Your financial investments consist of U.S. government bonds maturing in 10 years and shares in a start-up company doing research in pharmaceuticals.

How would you expect each of the following news items to affect the value of your assets? Explain your reasoning. ( LO2 )

a. Interest rates of newly issued government bonds rise.

b. Inflation is forecasted to be much lower than previously expected (Hint:

Recall the Fisher effect from Chapter 5.) Assume for simplicity that this information does not affect your forecast of the dollar value of the pharmaceutical company’s future dividends and stock price.

In parts c to

f, interest rates on newly issued government bonds are assumed to remain unchanged.

c. Large swings in the stock market increase financial investors’ concerns about market risk.

d. The start-up company whose stock you own announces the development of a valuable new drug. However, the drug will not come to market for at least five years.

e. The pharmaceutical company announces that it will not pay a dividend next year.

f. The federal government announces a system of price controls on prescription drugs.