ECON 4 Lecture Notes - Lecture 9: Yield Curve, Market Trend, Fixed Income

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aquamarinemanatee680

26 Feb 2019

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Kind of like a litmus test for how well the stock market is doing. Summarizes the health of the stock market (equities market) When you buy a bond, you know the exact time when the company is going to pay you back your interest payments. Sometimes bonds default, but they fail much less than stocks. With stocks, you can"t know the value of the stock at the time when you want to sell it. Used to determine the health of the bonds market. Fancy name for the interest rate/rate of return on the bond. The red line is how much the bond returns to you in the given amount of time. Short term bonds usually return less than long term bonds. This is because they have to pay you more for holding your money for longer. When the price goes up, the return goes down. When the price goes down, the return goes up.

Related Questions

When people find out that I am an economist(dinner parties, my kid's swim meets etc..) , they often ask me about the stock market, or they say something like how they wish they had studied economics so that they could make more on their "investments." As the quarter is coming to a close, you know that ecoonomics is about a lot more than Wall Street and the Dow Jones industrial average. Truth is, I study agriculture and worker's cooperatives - I don't know all tha much about stocks and bonds and high finance. What I do know is that, you can't consistantly beat the market. People are surprised to find out I don't "play the stock market." Sure, I save for retirement, but I use a very booring stradegy of holding an index fund. This week, we are going to look at active trading vs. index funds through the lense of a million dollar bet. This comes from the NPR planet money podcast.

beigepanda242

1.Consider the following four debt securities, which areidentical in every characteristic except as noted:
?W: A corporate bond rated AAA
?X: A corporate bond rate BBB
?Y: A corporate bond rated AAA with a shorter time to maturity thanbonds W and X
?Z: A corporate bond rated AAA with the same time to maturity asbond Y that trades in a more liquid market than bonds W, X, orY
List the bonds in the most likely order of the interest rates(yields to maturity) of the bonds from highest to lowest. Explainyour work.

2.Explain how an economist could use the slope of the yield curveto analyze the probability that a recession will occur and why thespread may matter.
3.One year ago, you bought a bond for $10,000. You receivedinterest of $400 at the end of the year, as well as your $10,000principal. If the inflation rate over the last year was fivepercent, calculate the real return. Show your work.
4.Suppose that the price of a stock is $50 at the beginning of ayear and $53 at the end of the year, and it pays a dividend of $2during the year. Calculate the stockâs current yield, capital-gainsyield, and the return. Show your work for three separatecalculations.
5.Use the capital-asset pricing model to predict the returns nextyear of the following stocks, if you expect the return to holdingstocks to be 12 percent on average, and the interest rate onthree-month T-bills will be two percent. Calculate a stock with abeta of -0.3, 0.7, and 1.6. Show your work for three separatecalculations.

goldcod670

QUESTION 16

Which of the following statements is true?

		The administrative costs per dollar are greater for a large loan than a small loan.
		The risk on a long-term loan is likely to be less than on a short-term loan, ceteris paribus.
		a and b
		none of the above

1 points

QUESTION 17

If the price for loanable funds is less than the return on capital, then firms will

		borrow in the loanable funds market and invest in capital goods, and as this happens, the quantity of capital decreases and its return rises.
		borrow in the loanable funds market and invest in capital goods, and as this happens, the quantity of capital increases and its return falls.
		not borrow in the loanable funds market, and over time the capital stock will decrease and the return on capital will fall.
		not borrow in the loanable funds market, and over time the capital stock will decrease and the return on capital will rise.

1 points

QUESTION 18

Economic rent is

		the payment a renter pays his or her landlord.
		payment in excess of fixed costs.
		payment in excess of opportunity costs.
		the same as interest if we are discussing a capital good purchase.
		none of the above

1 points

QUESTION 19

Suppose a bank makes a $1,000 loan to you at 5 percent interest when the expected and actual inflation rate are zero percent. Before you pay back the $1,000 principal and $50 interest, the inflation rate increases to 10 percent. Does anyone lose from this situation?

		Nobody loses, because the terms were set before the inflation rate increased, and once the terms are set, inflation does not affect the situation.
		You lose, because the dollars that you have borrowed are worth more the higher the inflation rate.
		The banker loses, because you will be paying back the loan with dollars that are worth less than the dollars you borrowed.
		Both the banker and you lose, for the reasons in answers b and c.
		There is not enough information to answer the question.

1 points

QUESTION 20

A change in the expected rate of inflation from 5 percent to 3 percent will

		decrease the real interest rate by 2 percentage points.
		decrease the real interest rate by 3 percentage points.
		increase the nominal interest rate by 2 percentage points.
		decrease the nominal interest rate by 2 percentage points.

ECON 4 Lecture Notes - Lecture 9: Yield Curve, Market Trend, Fixed Income

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