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Return on Financial Assets
There are a number of factors that affect bond pricing. The basic bond pricing formula is as follows:
Investopedia
In this formula, the coupon payments, number of payments, interest rate and value at maturity are taken into consideration. The question at hand pertains to bonds that are the same in all characteristics except time to maturity and risk level. The risk of the bond will be reflected in the interest rate and the time to maturity will be reflected in the number of payments remaining on the bond. Initially, it is easy to make a couple of basic assessments. The corporate bond with AAA will be rated more highly than one with BBB. This places BBB (X bond) last. With a lower time to maturity than bond W, the third bond (Y) will have a lower yield to maturity, because the shorter time to maturity will result in lower risk. Lastly, a more liquid market has a lower risk as well, so the final bond (Z) will have the lowest interest rate.
Lowest rate: Bond Z, 2nd-lowest rate: Bond Y; 2nd-highest rate Bond W, and highest rate...
Estrella and Mishkin (1996) argued that the spread between the rates on the 10-year Treasury note and the 3-month Treasury note (the yield curve) could be used as a predictor for U.S. recessions. Both short- and long-term rates have proven to be adequate predictors of future economic activity. When the yield curve begins to flatten, this signals expectations of a slowdown, while an inverted yield curve is a predictor of a recession. On an inverted yield curve, the short-term rates are higher than long-term rates of equivalent credit quality.
Thus, economist generally will study the yield curve and look for trends that signal if the yield curve is shifting to an inverted format. This means that the rates on long-term Treasuries are falling, indicating that the market believes that an economic slowdown will occur, stifling long-term growth. Short-term growth at this stage is still expected, because the yield curve is a predictor and the in long-term rates occurs before the actual recession.
3. To calculate the real return, we subtract the…
Works Cited:
Investopedia. (2011). Advanced bond concepts: bond pricing. Investopedia. Retrieved January 28, 2012 from http://www.investopedia.com/university/advancedbond/advancedbond2.asp#axzz1kmQexa4w
Investopedia. (2011). Capital asset pricing model. Investopedia. Retrieved January 28, 2012 from http://www.investopedia.com/terms/c/capm.asp#axzz1kmQexa4w
Estrella, A. & Mishkin, F. (1996). The yield curve as a predictor of U.S. recessions. Current Issues in Economics and Finance. Vol. 2 (7). Retrieved January 28, 2012 from http://www.ny.frb.org/research/current_issues/ci2-7.pdf
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(2009). Google's Big IPO, Five Years Later. [Article]. Wall Street Journal - Eastern Edition, 254(40), C3. Davis, H.Z., & Peles, Y.C. (1993). Measuring Equilibrating Forces of Financial Ratios. The Accounting Review, 68(4), 725-747. Google Inc. (2012). 2011 Annual Report. Mountain View, CA: Google Inc. Kirby, J. (2009). How Google really does it. (Cover story). [Article]. Canadian Business, 82(18), 54-58. Lee, M.-j. (2010). Measuring the Usage Effects of Tying a Messenger to Windows: A
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