Question Details

Long-term bonds will lose favor if inflation is not whipped because 


1. "Corporate treasurers should not be frightened by the recent rise in interest rates on bonds. Rates of even 13 percent will look like bargains if inflation heats up over the next 18 months." Rates of 13% will look like bargains because 
a) interest rates will fall if inflation increases 
b) bond prices are sure to rise in the near future 
c) interest rates are sure to fall in the near future 
d) interest rates will rise if inflation increases 
2. "Capacity utilization, at 82.4%, was unchanged in January for mines, factories and utilities. Economists are worried that demands on industry may soon outstrip capacity, thereby encouraging producers to raise prices. Inflation, the undisputed Achilles heel of bonds, would result." 
Explain why inflation is the Achilles heel (weak spot) of bonds. 
a) inflation increases the price of everything, including the price of bonds 
b) inflation means government needs more financing and so bond prices rise 70 
c) inflation increases the nominal interest rate and so decreases the price of bonds 
d) inflation increases the nominal interest rate which makes bonds too expensive to buy 
3. "This brings us back to the fears of higher interest rates before the market break. These fears are still potent, especially if investors see through the temporary reduction in interest rates made possible by stepping up the rate of creation of the money supply." 
This reduction in interest rates is thought to be only temporary because 
a) the central bank has no real control over the interest rate 
b) inflation expectations will rise, increasing the interest rate 
c) the money supply and interest rates are positively correlated 
d) the central bank will not have the courage to stick to this policy 
4. "The bond markets were stunned by the shock of Thursday's flash second-quarter news that the economy has grown three whole percentage points. Add that discomforting prospect to the other horrifying disclosure - that, at last reading, our money supply had climbed by a mammoth $4.8 billion - and you'll know why people were heading for the bond market exits." People are heading for the bond market exits because they suspect that 
a) inflation will fall b) interest rates will increase 
c) interest rates will decrease d) something illegal is happening 
5. "And many borrowers fear that if American inflation can't be whipped, American bond markets may evolve into replicas of Europe's capital markets - surrendering their status as providers of long-term, fixed-cost funds to government and industry." Long-term bonds will lose favor if inflation is not whipped because 
a) their prices will become too high b) their prices will become too volatile 
c) the Fed will refuse to buy or sell them d) the Fed will cut these bonds' interest rates




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