Question 3: (a) Describe how interest rates and credit risk affect the yield of corporate and government bonds. Why did the yield of Irish government bonds change so dramatically in recent years? [17 marks] (b) What is meant by the yield curve? What determines its shape? Why is it useful? [16 marks] Question 4: (a) Distinguish between technical analysis and fundamental analysis of share prices. What are the assumptions of the efficient market hypothesis? What are the implications for financial markets if markets are not efficient? [16 marks] (b) Describe the two main ways in which a firm can return cash to shareholders. Describe some potential considerations for a firm when deciding on its dividend [17 marks]
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Start by explaining how interest rates impact bond yields. When interest rates rise, the yield on existing bonds becomes less attractive compared to newly issued bonds with higher yields. This leads to a decrease in the price of existing bonds, as investors demand Show more…
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1. What do you think is the most important overall measure of the performance of bond markets? (5 marks) 2. Which fixed-income investment strategies, (out of the many fixed income investment strategies out there) would you give as advice to fixed income investors in the face of the bond market decline described in this article? [This requires you to identify, give brief description of each, and then justify your pick] (30 marks) 3. Give a balanced argument on whether ‘diversification’ is the antidote in the face of a bond market crisis such as this?
Akash M.
Use the information below to answer next four questions. Consider the joint distribution for bond price movements and stock price movements. For bonds, B=0 and B=1 correspond to bonds go down and bonds go up respectively. For stocks, S=0 and S=1 correspond to stocks go down and stocks go up respectively. B 0 1 S 0 .30 .2 1 .15 .35 14. What is the chance that stocks and bonds go down? a. .30 b. .2 c. .15 d. .35 15. What is the chance that stocks or bonds go down? a. .77 b. .30 c. .47 d. .07 16. Give that bonds go down, what is the probability that stocks go down? a. .3 b. .667 c. .45 d. .15 17. Give that stocks go up, what is the probability that bonds go up? a. .35 b. .50 c. .25 d. .70
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