Question 1.
a. What is the difference between interest rates and returns on a bond? Is the RET equal to the interest rate? Why or Why not?
b. What would be the rate of return on a coupon bond bought at face value of $1000 today( with a coupon rate of 15%) and sold for $1200 one year later ?
c. What is the method to calculate the rate of Capital Gain (g)? Is there a capital gain or loss in the above cae? How much?
Question 2.
Explain why you would be more or less willing to buy long-term Government bonds under the following scenarios: Use a demand and supply analysis for bonds, with a given initial equilibrium in the bonds market. ( Diagram necessary)
a.Trading in these bonds increases, making them easier to sell.
b.Relative risk of these bonds compared to other types falls
c.Suppose government has a surplus
Question 3.( Diagram nesscesary)
a. What is the distinction between Real and Nominal Interest rates?
b. Suppose we have an equilibrium in the bonds market with a given expected inflation (he). If inflation rate increases, What will happen to the demand and supply of bonds? Would you be able to say for sure (i.e. with certainty) what will happen to the price of bonds and what will be the quantity bought and sold? Why or why not?