When interpreting bond prices as present values, discuss what factors determine the price of a two-year discount bond. Include in your answer an explanation of how changes in each of these factors affects the price of a two-year discount bond
What will be an ideal response?
The price of the two-year bond will be a function of the face value, the current one-year rate and the future expected one-year rate. An increase in either of the one-year rates will reduce the present value of the bond and, therefore, reduce its price. An increase in the face value (constant) would increase the price.
You might also like to view...
If buyers of illegal goods are punished but sellers are not, then the price ________ and the equilibrium quantity ________
A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases
Suppose that a drug for treating cancer is cleared by the Food and Drug Administration and that the company is successful in obtaining a patent for its product. Which of the following is then TRUE?
A) The patent holder now faces barriers to entry. B) The method of producing the product would not be considered intellectual property. C) The patent holder has a monopoly. D) The drug would have many close substitutes.
The national debt
a. is currently greater than the annual federal deficit b. is reduced by the revenue generated from the federal deficit c. decreases as the deficit is reduced d. is a flow variable e. varies depending on developments in the stock market
What does a positive U.S. capital inflow signify?
a. Nothing b. That the government is running a budget deficit c. That more funds were invested in the U.S. by foreigners than the U.S. invested abroad during a given time period d. That the U.S. is running a trade surplus e. The U.S. net exports are positive