The Economy Is Slowing and Many Forecasters Predict a Recession

question 42

Multiple Choice

The economy is slowing and many forecasters predict a recession.You expect the monetary authorities to relax monetary policy which will cause interest rates to fall.You expect the yield on the Walt Disney 10-year bond to fall from 5% to 4%.The bond has a face value of $1,000,and a coupon of 3.25%.If you want to make $5,000 by investing in bonds to profit from the interest rate change,what position do you take?

• A) Buy 67 bonds
• B) Buy 81 bonds
• C) Buy 48 bonds
• D) Short sell 55 bonds
• E) Short sell 92 bonds

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Definitions:

Cash Dividend

A disbursement by a corporation from its profits to its stockholders, typically as cash.

Increases

The act or process of becoming larger or greater in size, number, value, or amount.

Preferred Stock

A class of ownership in a corporation that has a higher claim on assets and earnings than common stock, usually paying fixed dividends.

Common Stock

Equity security representing ownership interest in a corporation, with holders entitled to vote at company meetings and receive dividends.