Suppose Baa-rated bonds currently yield 8.8%, while Aa-rated bonds yield 6.8%. N

Question

Suppose Baa-rated bonds currently yield 8.8%, while Aa-rated bonds yield 6.8%. Now suppose that due to an increase in the expected inflation rate, the yields on both bonds increase by 1.5%. What would happen to the confidence index? (Round your answers to 4 decimal places.)

  Confidence index - Increases or

Decreases

from  

to .

Suppose Baa-rated bonds currently yield 8.8%, while Aa-rated bonds yield 6.8%. Now suppose that due to an increase in the expected inflation rate, the yields on both bonds increase by 1.5%. What would happen to the confidence index? (Round your answers to 4 decimal places.)

Explanation / Answer

Yield on Baa-rated bond = 8.8%

Yield on Aa-rate bond = 6.8%

Current Confidence Index = 6.8%/8.8% = 0.7727

New Yield on Baa-rated bond = 8.8% + 1.5% = 10.3%

New Yield on Aa-rated bond = 6.8% + 1.5% = 8.3%

New Confidence Index = 8.3%/10.3% = 0.8058

Thus, Confidence Index increases from 0.7727 to 0.8058

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.