Question

From February 2022, until today, the world has plunged into an economic recession due to the war in Ukraine. How has this affected Europe's inflation, interest rates, stock markets, and GDP?

What is the expected outcome before the end of the year and in the first quarter of 2024?

Question:

What do you expect to happen to the yields on European Sovereign Debt? Why? Write down an equation representing the liquidity premium theory of the term- structure of interest rates. Explain the intuition behind your model. Given that bond, traders expect inflation will change even further in 2022-23, draw and explain the shape of today’s yield curve (for 3mth - 2 year notes)

Answer 1

Answer:The easiest way to gauge liquidity premiums is to simply calculate the yield curve, or realized return, of two investments with different levels of liquidity. Assume, for example, that two bonds have the same initial investment and the same growth rate. However, one investment will mature earlier than the other, meaning it would be more liquid.

Explanation:Due to war, there happens to be an economic recession in the country. When the economy has slowed, inflation appears to remain high.Interest rates usually fall during a recession.Recession is the slowdown in the economic activities of a country. This slowdown might last for two or more quarters and cause a fall in a country’s Gross Domestic Product (GDP). Besides the GDP, other economic indicators, like corporate profits, employment opportunities, and more, also suffer a decline. Industrial activities and trading are reduced in a bout of recession. This ultimately leads to a reduction in the overall GDP. Core bond yields could reach a bottom and credit spreads may peak. Investors with junk bonds are mostly expected to suffer due to economic recession war in Ukraine. The liquidity premium is a form of extra compensation that is built into the return of an asset that cannot be cashed in easily or quickly.