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Tju [1.3M]
3 years ago
6

Suppose Baa-rated bonds currently yield 6%, while Aa-rated bonds yield 4%. Now suppose that due to an increase in the expected i

nflation rate, the yields on both bonds increase by 1%. What would happen to the confidence index? (Round your answers to 4 decimal places.)
Business
1 answer:
Leviafan [203]3 years ago
6 0

Answer:

Initial confidence index 66.67%

New confidence index 71.4%

Explanation:

Calculation of what would happen to the

confidence index

Using this formula

Confidence index=(Average yield for high grate bonds)/(Average yield for intermediate graded bonds)

Let plug in the formula

Initial confidence index=4%/6%

=0.6667 ×100

=66.67%

Due to increase in the yields the New Confidence Index will be;

New confidence index

=(4%+1%)/(6%+1%)

=5%/7%=0.7142857 or 0.714

0.714×100=71.4%

Hence, the New Confidence index tend to indicates slightly higher confidence and the reason for the increase in the index is the expectation of higher inflation.

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