The president of the European Central Bank (ECB) announced in September 2014 that the central bank plans to engage in a form of quantitative easing (QE) through the purchase of private sector credit, including asset-backed securities and covered bonds, in addition to a new cut in interest rates. In March 2015, ECB started the QE programme. The development of the 10 year government bond yield of the Euro area and of Italy is shown in Figure 2.

Effects

of QE on Government Bond markets.

1) What is the effect of the QE programme on the long-term Euro area government bond market in March 2015? Why do you see an earlier effect on the yield prior to March 2015? Explain briefly.

2) Assume in March 2015, the Italian government decided to issue 10 year government discount bonds and the face value of the bond is 100. What is the market price of the Italian bond given the information from Figure 1 (the monthly yield data)?