1. Using the supply-and-demand diagrams for bonds framework, show why interest rates are procyclical (rising when the economy is expanding and falling during recessions).
2. Using the supply-and-demand diagrams for bonds, show what the effect is on interest rates when the riskiness of bonds rises.
3. The chair of the Fed announces that he/she will fight the higher inflation rate with a new anti- inflation program. Predict what will happen to interest rates if the public believes him/her using supply-and-demand diagrams for bonds.
4. A 10-year, 7.2% coupon bond with a face value of $1,000 is currently selling for $875.65. Compute your rate of return (as a percent) if you sell the bond next year for $887.10.
5. Calculate the duration of a bond with $1000 par value and a 4.5 percent coupon rate, 4 years until maturity, and a 7 percent yield to maturity? What is the expected change in price if interest rates were to rise by 2%? (Assume annual coupons) Now calculate the approximate percent change for an equivalent zero-coupon bond.