Question

Suppose Baa-rated bonds currently yield 6.1%, while Aa-rated bonds yield 4.1%. Now suppose that due to an increase in the expected inflation rate, the yields on both bonds increase by 1.0%. What would happen to the confidence index? (Round your answers to 4 decimal places.)

Answer 1

Confidence index increases from 0.6721 to 0.7183

Step-by-step explanation:

The computation of the confidence index is shown below:

Initial Confidence Index is

= Aa-rated bonds yield ÷ Baa-rated bonds yield

= 4.1% ÷ 6.1%

= 0.6721

Since the yields on both bonds increase by 1.0%

So, the confidence index after increase in yield is

= (4.1% + 1%) ÷ (6.1% + 1%)

= 0.7183

So, Confidence index increases from 0.6721 to 0.7183