RETURN ON FINANCIAL ASSETS

Return on Financial Assets



Return on Financial Assets

Answer 1

Z: Corporate bond rated AAA

The interest rate of the corporate bond Z will be high as the bond is more liquid than the other three corporate bonds that are W, X and Y. The reason of this statement is that, as the maturity time of Z is small and it is more liquid, it possible be traded in the equity market where the risk on the bond is high due to the fluctuations in the market. Therefore, the interest rate or the yields to maturity of bond Z will be high.

Y: Corporate bond rated AAA

The yields to maturity of the corporate bond Y will be low as compared to Bond Z, but the interest rate of bond Y will be higher than the W and X. Because the bond Y has shorter time to maturity than bonds W and X and it is rated as AAA in credit rating; thus, the bond Y is more liquid than bond W and X with higher yields to maturity than W and X, lower yields to maturity than bond Z.

W: Corporate bond rated AAA

The interest rate of the corporate bond W will be low in comparison to bond Y and Z; however, the interest rate of W will be higher than the bond X. The reason of this statement is that, as the bond W is rated as AAA which means its credit rating is better than the bond X, though the bond W is not liquid as it will require more time to liquid than the bond Y and Z; thus, the yields to maturity will be lower in the case of bond W as compared to the Y and Z.

X: Corporate bond rate BBB

The yields to maturity of the corporate bond X will be lower as compared to Bond W, Y and Z because the bond W is rated as BBB which means its credit rating is not good as compared to bond W, Y and Z. In addition to this, it will also require more time to liquid than the other bonds; therefore, the yields to maturity of corporate bond X will be lower as compared to the bond W, Y and Z.

Answer 2

Use the Slope of the Yield Curve to analyze the Probability of Recession

The slope of the yield curve can be used to analyze the probability ...