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Two bonds A and B have the same credit rating, the same par value and the same coupon rate. Bond A has 30 years to maturity and bond B has five (5) years to maturity. Please demonstrate your understanding of interest rates risk by answering the following questions :
Question 1: Discuss which bond will trade at a higher price in the market
Question 2: Discuss what happens to the market price of each bond if the interest rates in the economy go up.
Question 3: Which bond would have a higher percentage price change if interest rates go up?
Question 4: Please substantiate your argument with numerical examples.
Question 5: As a bond investor, if you expect a slowdown in the economy over the next 12 months, what would be your investment strategy?
Question 6: Familiarity with random variables is essential to understand the basics of portfolio theory. Given that CLA2 assignment is about portfolio formation, you need to strengthen your skills in dealing with random variables.
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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