Question

1. Current US Treasury Markets indicate that the bonds will rise and proxies for risk-free-rates will fall.

a. How will this impact nominal rates and risk premiums?

b. What are the implications of falling risk-free-rates?

Answer 1

Raising bond prices are an indiaction of falling interest rates and an inevitable economic slowdown/recession.

a. If investors thinks that in the near future an economic recession is possible, then they demands higher rsik premium beacuse higher risk taking by lending the money. Beacuse of higher rsik premium, the nominal interesst rates also increases.

b. As already mentioned above, falling risk free rates are indication of economic recession.