Question

At the end of July, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 7.65% and 8.42%, respectively. At the end of August, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 6% and 6.71%, respectively. The confidence index ________ during August, and bond technical analysts are likely to be ________. (Hint: you have to find the confidence index for July and August separately and compared to of them)

		increased; bullish
		increased; bearish
		decreased; bullish
		decreased; bearish

Answer 1

In this question we have to calculate Confidence Index of Bonds for two periods July & August separately.

Confidence Index is also known as Barron's Index which is a ratio by which we calculate investors desire to assume in taking additional risk during investment.

How to find this ratio?

Formula for calculation of Confidence Index(Barron's Index):

Average Yield on Higher rated Bonds / Average Yield on Intermediate rated Bonds

From the question, At the end of July we have Average yield on 10 top-rated bonds = 7.65%

and Average yield on 10 intermediate grade bonds are = 8.42%

Confidence index at the end of July = 7.65% / 8.42% = 0.9085

Now at the end of August:

Average yield on 10 top-rated bonds = 6%

and Average yield on 10 intermediate grade bonds = 6.71%

Confidence index at the end of August = 6% / 6.71% = 0.8942

Hence, If we see both the values i.e., 0.9085 & 0.8942, values from July to August has decreased which in turn shows that the Investors confidence has also decreased and this is because of bearish view of the investors.

Hence, Option (d) is correct.