Weekly Online Forum: If there is a decline in interest rates, which would you rather be holding, long-term bond

Weekly Online Forum: If there is a decline in interest rates, which would you rather be holding, long-term bond

 

answer:

Question 3.2) Answer:- Long-term bonds.

Explanation:- If there is fall in interest rates then the price of long-term bonds will rise more in comparison to price of short-term bonds. Thus, Long-term bonds should be held instead of short-term bonds in case the interest rates are falling / declining.

Note:- Long-term bond has greater interest rate risk.

Question 4.3.2) Answer:-

a). More willing to buy a house.

Reason:- There will be more willingness to buy a house under the given circumstance because the totalwealth of buyer of house property will increase as a result of buying the house.

b). More willing to buy a house.

Reason:- House has become highly liquid now i.e., it is less costly (economical) for buyer of house property to buy a house now due to decrease in real estate commission from 6 % of sales price of house to 4 % of sale price of house.

c). Less willing to buy a house.

Reason:- There will be less willingness to buy a house due to fall in expected return of Polaroid stock i.e., the expected return of Polaroid stock has decreased.

d). More willing to buy a house.

Reason:- There will be more willingness to buy a house because less risk involved in buying a house instead of investing in stock market.

e). Less willing to buy a house.

Reason:- There will be less willingness to buy a house because the expected return from housing property has decreased.

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