Answer to Question #235794 in Political Science for Comfort

Question

a. At the end of September. a barrel of light crude sold for almost S70 comp:ircd to a price
near S30 a barrel in January of 2004. To answer
the follow
ing questions. assume that
bond traders expect inflation to rise from 3 percent
in 2005 (history) to 5 percent in both
2006 and 2007 (expected inflation). Also. traders expect the Zambian economy to enter a
recession
in 2007. Assume that prior
to the recent run up in oil prices. bond traders had
expected inflation to remain stable ii). 2006-2007 at 3 percent.

II. Using a model of the supply and demand for I year T-bills. illustrate and explain the
impact of a recession
(a business cycle contracti
on). If bond, traders expect that this
recession will occur in 2091. what do they expect
to happen to yields one-year T-bill?
in 2007? (5 Marks)

Answer 1

As exposed from the above graph, the demand for bonds decreases, while the supply of bonds decreases by a remarkable velocity than the demand, resultant in a lower equilibrium interest rate.

ii). A decline in predominant yields means that a depositor can profit from capital appreciation in counting to the yield. Equally, rising rates can lead to loss of principal, hurting the value of bonds and bond funds.