Prompt

You are an economic advisor to General Motors Company (GM), a multinational corporation based in Detroit, Michigan that designs, manufactures, markets, and distributes automobiles and offers myriad financial services. GM employs more than 180,000 people and serves six continents. Currently, GM owns very large quantities of long-term U.S. Treasury bonds and long-term AAA-rated corporate bonds. You confer daily with the firms chief financial officer, Ms. Dhivya Suryadevara. Today, Ms. Suryadevara asks you to assess how each of the following announcements will affect current prices and yields to maturity of various types of bonds. In your response to each announcement Ms. Suryadevara presents you, please carefully defend your reasoning: specifically, explain how the announcement affects current movements of and along the demand and supply curves for the types of bond(s) in question. For simplicity, assume the supply curve of each type of bond is vertical and, thus, the quantity supplied of each type of bond is insensitive to movements in its price.

Part 1:

Later this morning, Ms. Suryadevara will appear on CNN, where she will announce that, in March 2020, she will double the firms holdings of long-term AAA-rated corporate bonds. A purchase this large would move financial markets. Ms. Suryadevara asks you to assess how her announcement this morning will affect todays prices and yields to maturity of long-term U.S. Treasury bonds and long-term AAA-rated corporate bonds.

Part 2:

Later this morning, Ms. Suryadevara will appear on CNN, where she will announce that, in her expert opinion, long-term AAA-rated corporate bonds are far less liquid than most holders of these bonds realize. Ms. Suryadevaras expert opinion would move financial markets. Ms. Suryadevara asks you to assess how her announcement this morning will affect todays prices and yields to maturity of long-term U.S. Treasury bonds.

Part 3:

Today, Ms. Suryadevara apprises you of a discussion she had recently with House Budget Committee Chair John Yarmuth (D-KY). In the discussion, Chair Yarmuth shared his concern that, later this year, Congress might fail to raise the U.S. debt ceiling and, thus, the U.S. Treasury mightat least technicallydefault on its debt. Later this morning, Chair Yarmuth will appear on CNBC, where he will publicly air his concern. Ms. Suryadevara asks you to assess how Chair Yarmuths announcement this morning will affect todays prices and yields to maturity of long-term U.S. Treasury bonds.