Problem. This section hastrue/false questions. You must justify your answer dete

Question

Problem. This section hastrue/false questions. You must justify your answer determine credit. (a) True or False: Under the expectations hypothesis, if the yield curve is upward- sloping, the market must expect an increase in short-term interest rates (b) True or False: Both Target Corporation and Frank, owner of Frank's Local Hardware, issue bonds of the same maturity length to raise money to fund improvements to their respective businesses. These bonds have the same yield to maturity. (c) True or False: An investor buys a 2 year zero bond, holds it for one year and resells it. The price at which it sells depends on whether the buyer of the hond believes in the expectations hypothesis or liquidity preference theory.

Explanation / Answer

a) False because the upward sloping curve signifies that the economy will grow in the near future and the and this will lead to high inflation and high interest rates in the long term. The upward sloping curve indicates expansion in the economy and investor won't purchase long term bond unless a higher return is offered.

b) False because they might have different credit worthiness in the market. For example : Target may be a AA rated whereas, Frank may be BBB rated which might force Frank issue bond at a higher yield to attract customers.

c) False because the zero coupon bonds always pay at the end of the maturity period.

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