Suppose that the current rate is 4% and markets expect the Fed to increase the rate to 4.5% at the next meeting. Then some economic news is released, leading markets to expect that at its next meeting, the Fed will set its rate at 4% with probability 50% and at 4.5% with probability 50%. Then the Fed ends up not changing its rate relative to the last meeting. What happens to the price of Treasury bonds? options: Prices go down then up. Prices go down then down. Prices don't change. Prices go up then up. Prices go up then down.

Suppose that the current rate is 4% and markets expect the Fed to increase the rate to 4.5% at the next meeting. Then some economic news is released, leading markets to expect that at its next meeting, the Fed will set its rate at 4% with probability 50% and at 4.5% with probability 50%. Then the Fed ends up not changing its rate relative to the last meeting. What happens to the price of Treasury bonds? options: Prices go down then up. Prices go down then down. Prices don't change. Prices go up then up. Prices go up then down.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 3Q: The rate of return on a bond held to its maturity date is called the bonds yield to maturity. If...

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