1. Bond investors are likely to hold the view that the government guarantee on Federal bonds...

1. Bond investors are likely to hold the view that the government guarantee on Federal bonds means that the investor will get his investment back. He’s right about the assumption that the U.S. Treasury is extremely unlikely to default on their payments and therefore repayments carry close to 0 risks. But can we say the same when it comes to interest-rate and inflation risk? Explain fully.

Expert Solution

Answer :

In general federal bonds are risk free bonds .

Risk free bonds pays principal value and interest payment with absolute certinity .In theoretical there zero risk in risk free bonds but there is low probability of default risk and high probability of interest rate risk .

For the federal bond(risk free) holders government guarantee that the investment will be back .As compared to other type of bonds the default risk is very low because in this case the bond writer is central bank so the view or the assumption of the investor is acceptable .

But in case of interest rate risk there is high probability of ups and downs in interest payments because at the time of issue Treasury bonds interest rate is fixed but in the market the fed changes the interest rates time to time so in interest rates there is high probability of risk.

The concept of inflation also vests with the central bank ,mainly to control inflation central banks do their activities like changes in interest rates as we mentioned above how interest rates effects the Treasury bonds in the same way inflation also effects the Treasury bonds.

jeff jeffy answered 2 years ago

1. During an ‘economic contraction’, why is it likely that the federal government budget will move...

1. During an ‘economic contraction’, why is it likely that the federal government budget will move into deficit? 2. Identify and discuss whether each of the following is: an expansionary fiscal policy; a contractionary fiscal policy; or not a fiscal policy. i. The personal income tax rate is lowered. ii. The government increases spending on defence due to a change in spending priorities. iii. The company income tax rate is lowered. iv. New South Wales builds a new tollway to...

In your view, what is the primary UNCERTAINTY and the primary RISK of a Federal Government...

In your view, what is the primary UNCERTAINTY and the primary RISK of a Federal Government choice to try (or not to try) to influence the Social Security cost-of –living adjustments? (300-500 words)

1. Do you agree with the Organic view of government or the Mechanistic view of government?...

1. Do you agree with the Organic view of government or the Mechanistic view of government? Explain your reason. 2. There is a political discussion about building a wall in the southern border of the US. What is the opportunity cost of building a wall? What is the opportunity cost of not building a wall? 3. Some people want the US government provide more services to general public like building roads, schools, and providing health care while other people disagree....

1)Bonds issued by the Asian Development Bank (ADB) would most likely be: quasi-government bonds. supranational bonds...

1)Bonds issued by the Asian Development Bank (ADB) would most likely be: quasi-government bonds. supranational bonds global bonds. 2) Will Smith, is estimating a value for an infrequently traded bond with 6 years to maturity, an annual coupon of 7%, and a single-B credit rating. Kate obtains yields-to-maturity for more liquid bonds with the same credit rating: 7% coupon, 8 years to maturity, yielding 7.20%. 7% coupon, 5 years to maturity, yielding 6.40%. The infrequently traded bond is most likely...

Would it be more likely for the federal government to increase taxes or decrease spending?

Statement Cooperative or dual federalism Under this view of federalism, the states and the federal government...

Statement Cooperative or dual federalism Under this view of federalism, the states and the federal government share powers. States hold all powers not specifically delegated to the federal government in the U.S. Constitution under this view of federalism. The national governments and the governments of all fifty states are viewed as sovereign entities, possessing the power to govern themselves. The relationship between the federal and state governments involves shared responsibilities according to this view of federalism.

In the Keynesian view, would a constitutional amendment that would require the federal government to balance...

In the Keynesian view, would a constitutional amendment that would require the federal government to balance its budget (incur no deficit) be desirable? Explain your answer.

a. Why might investors opt to hold shares rather than bonds in their potfolios (you may...

a. Why might investors opt to hold shares rather than bonds in their potfolios (you may want to define what portfolios are first) b. In valuing shares, several valuation methods have been highlighted. What are they and which one is superior (simpler) among them? c. Explain the valuation errors in relation to valuing equity shares

Bond A and Bond B are zero-coupon bonds issued by the same government. Bond A is...

Bond A and Bond B are zero-coupon bonds issued by the same government. Bond A is due to mature in exactly t years from today, and Bond B is due to maturity in exactly T years from today (t<T). If the zero rate curve (for the government bonds) is downward sloping, which of the following statements is correct? A. Since there two bonds are issued by the same government, the yield of Bond A is the same as the yield...

Discuss the conditions under which investors would prefer to hold short-term bonds and when they would...

Discuss the conditions under which investors would prefer to hold short-term bonds and when they would prefer to hold long-term bonds. Find an Internet site that explains duration and how investors should utilize it in determining the appropriate bond investing strategy, given current interest rates and interest rate expectations. Provide a link for your classmates.

Question