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Let two U.S Treasury Bonds:
Long Term Bond (LTB) pays $1000 at the end of ten years.
Short Term Bond (STB) pays $1000 at the end of one year.
1) Effective interest rates are equal to 2% / year. Which bond will sell for a lower price?
\( LTB : \frac{1000}{(1+0,02)^{10}}= 820,35 \\ STB : \frac{1000}{(1+0,02)}= 980,39 \)
So it's LTB.
2) If there is a surprise interest rate cut of 0.5% for all, which bond will have a larger percentage price drop?
Why would the price drop? isn't it the other way around? I don't understand it
3) Would stock prices be affected by this surprise interest cut ? If yes, in which direction ?
Thanks in advance for your help !
Long Term Bond (LTB) pays $1000 at the end of ten years.
Short Term Bond (STB) pays $1000 at the end of one year.
1) Effective interest rates are equal to 2% / year. Which bond will sell for a lower price?
\( LTB : \frac{1000}{(1+0,02)^{10}}= 820,35 \\ STB : \frac{1000}{(1+0,02)}= 980,39 \)
So it's LTB.
2) If there is a surprise interest rate cut of 0.5% for all, which bond will have a larger percentage price drop?
Why would the price drop? isn't it the other way around? I don't understand it
3) Would stock prices be affected by this surprise interest cut ? If yes, in which direction ?
Thanks in advance for your help !
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