CALUMS Financial Management Bonds Credit Rating Discussion Two bonds A and B have the same credit rating, the same par value and the same coupon rate. Bond

CALUMS Financial Management Bonds Credit Rating Discussion Two bonds A and B have the same credit rating, the same par value and the same coupon rate. Bond A has 30 years to maturity and bond B has 5 years to maturity.

– Discuss which bond will trade at a higher price in the market

– Discuss what happens to the market price of each bond if the interest rates in the economy go up.

– Which bond would have a higher percentage price change if interest rates go up?

– Try to substantiate your argument with a numerical example.

As a bond investor, if you expect slowdown in the economy over the next 12 months, what would be your investment strategy?

Provide your explanations and definitions in detail and be precise. Comment on your findings. Provide references for content when necessary. Provide your work in detail and explain in your own words. Support your statements with two peer-reviewed in-text citation(s) and reference(s).

Question 2

The cost of long-term borrowing is usually higher than the cost of short-term borrowing. The graph that shows the relationship between maturity and interest rates for U.S. Government’s borrowings (Treasuries) is called “term structure of the interest rates” or “the yield curve”. Shape of the yield curve is often used by economists to forecast future status of the economy

1. Discuss why long-term rates are usually higher than short-term rates (upward yield curve)

2. Discuss under what economic conditions long-term rates might not be higher than shortterm rates (flat or inverted yield curve).

3. Go to http://www.bloomberg.com, browse various links on the site, find the yield curve for the day of your search, and

4. Interpret your observation of the yield curve.

Give two peer reviewed references that matches in text citations.