/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q8. The U.S. government issues longe... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 17: Q8. (page 368)

The U.S. government issues longer-term bonds with horizons of up to 30 years. Why do 20-year bonds issued by the U.S. government have lower rates of return than 20-year bonds issued by corporations? And which do you think has the higher rate of return, longer-term U.S. government bonds or short-term U.S. government bonds? Explain.

Short Answer

Expert verified

The 20-year bonds issued by the U.S. government have lower rates of return than 20-year bonds issued by corporations because the bonds issued by the government are less risky.

The longer-term U.S. government bonds have a higher rate of return than the short-term U.S. government bonds.

Step by step solution

01

Step 1. Lower returns on government bonds compared to corporations

The higher the risk associated with the asset, the higher are the returns. The bonds issued by the U.S government are considered less risky than the bonds issued by the corporations. So, U.S. government bonds have lower rates of return.

02

Step 2. Higher returns on long term government bonds 

The longer-term U.S government bonds have a higher return than the short run because the investors need high returns as compensation for waiting for the longer term.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Next, consider another pair of assets, C and D. Asset C will make a single payment of \(150 in one year while D will make a single payment of \)200 in one year. Assume that the current price of C is \(120 and that the current price of D is \)180.

c. What are the rates of return of assets C and D at their current prices? Given these rates of return, which asset should investors buy and which asset should they sell?

d. Assume that arbitrage continues until C and D have the same expected rate of return. When arbitrage ends, will C and D have the same price?

Compare your answers to questions a through d before answering question e.

e. We know that arbitrage will equalize rates of return. Does it also guarantee to equalize prices? In what situations will it equalize prices?

Asset X is expected to deliver 3 future payments. They have present values of, respectively, \(1,000, \)2,000, and \(7,000. Asset Y is expected to deliver 10 future payments, each having a present value of \)1,000. Which of the following statements correctly describes the relationship between the current price of Asset X and the current price of Asset Y?

  1. Asset X and Asset Y should have the same current price.

  2. Asset X should have a higher current price than Asset Y.

  3. Asset X should have a lower current price than Asset Y.

It is a fact that (1 + 0.12)3 = 1.40. Knowing that to be true, what is the present value of \(140 received in three years if the annual interest rate is 12 percent?

  1. \)1.40

  2. \(12

  3. \)100

  4. $112

Sammy buys stock in a suntan-lotion maker and also stock in an umbrella maker. One stock does well when the weather is good; the other does well when the weather is bad. Sammy鈥檚 portfolio indicates that 鈥渨eather risk鈥� is a _______ risk.

  1. diversifiable

  2. nondiversifiable

  3. automatic

Suppose that a risk-free investment will make three future payments of \(100 in one year, \)100 in two years, and $100 in three years. If the Federal Reserve has set the risk-free interest rate at 8 percent, what is the proper current price of this investment? What is the price of this investment if the Federal Reserve raises the risk-free interest rate to 10 percent?
See all solutions

Recommended explanations on Economics Textbooks

Taxation Economics

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.