Answer to Question 6
•Interest rate risk is the risk that arises for bond owners from fluctuating interest rates. •All else the same, if interest rates are expected to fall you should purchase longterm bonds and sell shorter-term.

Answer to Question 7
• Essentially, the issuer takes the opposite side of the interest rate risk position. • By issuing long-term bonds, the corporation is essentially betting that rates won't fall significantly. If they do, the corporation will incur a loss due to borrowing at rates higher than the going market rates. • On the other hand, if rates rise, the corporation benefits by having locked in its borrowing rate for up to 100 years. • In addition, these bonds are a source of long-term financing where the cost, i.e. the interest, is tax deductible. If the firm should issue stocks, the cost, i.e. the dividends, are not tax deductible. • This is why the IRS frowns on 100 year bonds.
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Answer to Question 9
This is a very difficult scenario for the Fed Chair. It is called stagflation and the combination of high inflation and unemployment reduces the effectiveness of any monetary policy action to provide sustained relief to the economy’ s problem. Decreasing reserve requirements and lowering interest rates may reduce unemployment temporarily, but these actions will also likely exacerbate inflation, drive up wages and with a higher labor supply cost, eventually drive unemployment back up. The end result is that the employed and the unemployed face higher prices.
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Answer to Question 9 - continued
Alternative policy actions may include fiscal spending, removing the factor(s) causing the problems (such as a supply constraint causing a lack of oil availability), or perhaps stimulating greater global growth to get U.S. domestic demand growing.
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