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Question - Assume that, although recent economic performance has been weak, it is predicted that a strong economic recovery will soon take hold, raising employment and output.
a) Describe the impact this economic scenario will have on the overall level of interest rates in general. Explain step by step (that is; event; factor affected; curve shifted; result) how the anticipated recovery will lead to this outcome.
b) Describe the impact this scenario will have on the yield spread between investment grade and high-yield (junk) bonds. Explain step by step how a recovery will lead to this outcome.
c) In this economic environment, your boss at UNLV Securities tells you that a number of corporate clients are considering bond issues to raise new funds and asks you to write a memo providing guidance to the account executives on how to advise them. Specifically you are asked for recommendations as to whether clients should be advised to go ahead with their proposed issues now, or to wait until interest rates have had a chance to respond to the anticipated improvement in the economy. If this recommendation depends on the client's credit rating, explain what your recommendation is for each type of client separately. In each case be careful to explain your reasoning.
Assume interest rates for bonds today is 5% for an AAA rated bond. Calculate the price of the bond you have selected relative to the 5%. Is the bond selling at a premium or
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