Question

Indicate and Discuss how will be affected the prices (and the yields) of the next Bonds (no calculations required) i. US Treasury Bonds with Moderate GDP Growth ii. German Government Bonds with Higher than expected GDP Growth iii. Investment Grade Corporate Bonds with Terrorist attack in London, NY. iv. Spanish, Italian and Portuguese Bonds with EU Debt Crisis v. High Yield Corporate Bonds with US Debt out of control due to Trump cutting Taxes.

Answer 1

Bond prices and yields are inversely related. Higher bond yields results in lower bond prices, and lower bond yields result in higher bond prices.

i]

With moderate GDP growth, bond prices and yields may not be affected, since the expected GDP growth is already incorporated into the prices of bonds

ii]

With higher than expected GDP growth, bond prices may fall and yields may rise. The central bank may increase interest rates to control inflation. This would put upward pressure on yields, resulting in lower bond prices. Further, investments may be reallocated from bonds to equity for higher returns. This would cause a fall in bond prices, and a rise in yields

iii]

With a terror attack, the bond yields would rise and bond prices would fall. This is because of higher uncertainty and risk. The bond investors would require higher yields to compensate for increased risk

iv]

With a debt crisis, the bond yields would rise and bond prices would fall. This is because of higher uncertainty and risk. The bond investors would require higher yields to compensate for increased risk