Question
a)All other things equal, explain how the following would impact equilibrium interest rates in capital markets: 1) supply of funds increases, 2) expected inflation decreases,
a)All other things equal, explain how the following would impact equilibrium interest rates in capital markets: 1) supply of funds increases, 2) expected inflation decreases, 3) savers prefer current versus future consumption.
b)All other things equal, how would the following impact a bonds yield to maturity: 1) The bond is upgraded by the rating agencies, 2) The economy appears to be headed toward a recession, 3) The bonds price increases, 4) New laws are passed that make it more difficult for bondholders to receive payment in the event of bankruptcy
c)What is the difference between interest rate risk and reinvestment rate risk? Give an example of a bond that would expose the investor to interest rate risk. To reinvestment rate risk
d)Explain at least two factors that limit the Federal Reserves ability to have complete control over market interest rates.
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