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Financial Economics
Question 1
(A) State whether the following statements are True, False or Uncertain. Provide a short justification for your answer.
(i) Bond A is a 5year bond with a 9% coupon rate and a YTM of 9%. Bond B is a 15year bond with a 8% coupon rate and a YTM of 10%. Both bonds have the same par value. Price of Bond A is higher than Price of Bond B.
(ii) The expectation hypothesis indicates a flat yield curve if anticipated future shortterm rates exceed current short term rates. (iii) For a discount bond, Coupon rate>YTM>Current Yield.
(B) Explain why we observe flat, upward sloping and inverted yield curves in the market. Give some examples from the web.
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The U.S. economy fell into a recession in 2001 and then proceeded into a slow-growth recovery due to a decline in investment. A. Explain how a change in investment can have a big impact on GDP causing a national recession.
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