A:
1. Consider the following four debt securities, which are identical 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
than bonds W and X Z: A corporate bond rated AAA with the same time to maturity
as bond Y that trades in a more liquid market than bonds W, X, or Y. List the
bonds in the most likely order of the interest rates (yields to maturity) of
the bonds from highest to lowest. Explain your work.
2.
Explain how an economist could use the slope of the yield curve to analyze the
probability that a recession will occur and why the spread may matter
3.
One year ago, you bought a bond for $10,000. You received interest of $400 at
the end of the year, as well as your $10,000 principal. If the inflation rate
over the last year was five percent, calculate the real return. Show your work
4.
Suppose that the price of a stock is $50 at the beginning of a year and $53 at
the end of the year, and it pays a dividend of $2 during the year. Calculate
the stock’s current yield, capital-gains yield, and the return. Show your work
for three separate calculations
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