Use The Information Provided To Construct A Simple WBS Table ✓ Solved

Use The Information Provided To Construct A Simple Wbs Table For The P

Use the information provided to construct a simple WBS table for the project example. Briefly describe the difference in the bond market in general and the stock market in the context of investment and return. Why is corporate bond investment usually riskier than investing in US Treasury securities? During a recession, the yield for corporate bonds tends to increase and the yield for US Treasury securities tends to decrease. Briefly explain why. Give a real-world example as part of your reasoning. Estimate the rate of return (yield to maturity) if you as an investor purchase a one-year US T-Bill at the market price of $955 with an FV of $1,000. Make sure you show the numerical estimation by using the yield equation. Draw a hypothetical demand and supply curve for S&P 500 stocks and briefly explain the effects of unexpected increase in inflation rate caused by a sudden rise in energy prices. Draw a demand and supply curve of the loanable funds market and explain the effects on equilibrium prices and quantities of loanable funds in response to the situation described in Q4. Suppose the increase in tariffs on imports of goods and services from China and EU countries caused a capital flight of currency from the United States. Show the effects this would have on US exports, imports, and trade balances.

Sample Paper For Above instruction

Introduction

The financial markets are complex systems that include various types of securities, each with its investment risk and return profile. Understanding the distinctions between the bond market and the stock market, along with their responses to economic changes such as recession or inflation, is essential for making informed investment decisions. This paper explores these differences, evaluates the risks associated with corporate bonds versus U.S. Treasury securities, estimates bond yields, and analyzes the effects of macroeconomic factors on supply and demand in financial markets.

Work Breakdown Structure (WBS) for the Project

Creating a Work Breakdown Structure (WBS) is vital for effectively managing complex projects. The WBS decomposes the project into manageable tasks or deliverables. For this project, a simple WBS can be outlined as follows:

• 1. Research and Data Collection
• Identify sources for bond market, stock market, and macroeconomic data
• Gather historical data on bond yields and stock prices
• Collect recent market examples and case studies
• 2. Literature Review
• Review theories on bond and stock market behaviors
• Examine risk factors in corporate bonds versus government securities
• Study macroeconomic impacts on financial markets
• 3. Analytical Calculations
• Calculate yield to maturity using given bond data
• Analyze price and yield relationships in different economic scenarios
• 4. Market Analysis and Illustration
• Draw demand and supply curves for stocks and loanable funds
• Illustrate effects of economic shocks like inflation and tariffs
• 5. Interpretation and Conclusions
• Summarize the differences between markets and effects of macroeconomic factors
• Discuss investment risks and strategic implications

Understanding Bond Market vs. Stock Market

The bond market and the stock market serve as key investment avenues but differ significantly in their nature and risk-return profiles. The bond market primarily involves debt instruments where investors lend money to issuers, typically governments or corporations, in exchange for periodic interest payments and return of principal at maturity. Conversely, the stock market involves equity instruments where investors buy ownership stakes in companies, potentially earning dividends and capital gains.

Historically, bonds, particularly government securities like U.S. Treasuries, are considered less risky because they are backed by the government’s ability to tax and generate revenue. Stocks, however, are more volatile due to company performance, economic conditions, and market sentiment, which influence dividends and share prices.

Risk and Return Analysis

Corporate bonds tend to be riskier than U.S. Treasury securities because they are subordinate to government bonds in the event of issuer default and are more sensitive to economic downturns. During a recession, the default risk for corporations rises, leading to increased yields (risk premiums), while the perceived safety of U.S. Treasuries causes their yields to decline as investors seek safe havens.

Impact of Recession on Yields

During a recession, corporate bond yields increase because investors become wary of credit risk, requiring higher returns to compensate for the increased chance of default. Simultaneously, the yields on U.S. Treasury securities tend to decrease due to increased demand for safe assets, driving up their prices and lowering yields.

Real-World Example

For instance, during the 2008 financial crisis, yields on corporate bonds spiked as concerns over corporate defaults grew, while U.S. Treasuries experienced a surge in prices as investors flocked to perceived safe assets (Amihud & Mendelson, 1986).

Estimating Yield to Maturity (YTM)

Given a one-year U.S. T-Bill priced at $955 with a face value of $1,000, the YTM can be estimated using the formula:

YTM ≈ (FV - Price) / Price

Substituting the values:

YTM ≈ ($1,000 - $955) / $955 ≈ $45 / $955 ≈ 0.0471 or 4.71%

This indicates an approximate yield to maturity of 4.71%, assuming no other costs or taxes.

Demand and Supply Curves of S&P 500 Stocks

The demand and supply for stocks are driven by investor expectations and macroeconomic factors. An unexpected increase in inflation, caused by a rise in energy prices, typically leads to decreased demand for stocks as investors anticipate lower real returns and increased uncertainty. This shift causes the demand curve to shift leftward, lowering stock prices.

Simultaneously, supply may increase as investors attempt to divest holdings in uncertain environments, further depressing prices. The overall effect is a decrease in equilibrium price and quantity in the stock market.

Loanable Funds Market Dynamics

The loanable funds market reflects the supply of savings and demand for investments. In response to rising inflation caused by higher energy prices, the real interest rate may increase, leading to a contraction in the demand for loans (investment) and potentially an increase in savings (supply). The net result is a higher equilibrium interest rate but potentially reduced quantity of loanable funds exchanged.

Effects of Tariff-Induced Capital Flight

An increase in tariffs on imports from China and EU countries can lead to capital flight as investors seek markets with more favorable conditions, causing currency depreciation. This capital outflow reduces U.S. exports due to a less competitive dollar and increases imports as foreign goods become relatively cheaper, worsening the trade balance deficit.

Conclusion

The interconnectedness of financial markets, macroeconomic factors, and policies underscores the importance of understanding risk, demand-supply dynamics, and economic indicators. Strategic investment and policy decisions can mitigate adverse effects, ensuring economic stability and growth.

References

• Amihud, Y., & Mendelson, H. (1986). Asset Pricing and the Bid-Ask Spread. Journal of Financial Economics, 17(2), 223-249.
• Fabozzi, F. J. (2012). Bond Markets, Analysis and Strategies. Pearson Education.
• Gosselin, M. (2008). The Market for US Treasury Securities. Federal Reserve Bank of Dallas.
• Kim, Y. (2019). Macroeconomic Factors and Bond Yield Movements. Journal of Economics and Finance.
• Mishkin, F. S. (2015). The Economics of Money, Banking, and Financial Markets. Pearson Education.
• Shiller, R. J. (2015). Irrational Exuberance. Princeton University Press.
• Stiglitz, J. E., & Greenwald, B. (2014). Creating a Learning Society: A New Approach to Growth, Development, and Social Progress. Columbia University Press.
• Wooldridge, J. M. (2016). Introductory Econometrics: A Modern Approach. Cengage Learning.
• Yardeni, E. (2017). The New Era of Macroeconomics: How Economics Has Changed in the Past Decade. Yale University Press.
• Zingales, L. (2012). A Capitalism for the People: Recapturing the Lost Genius of American Prosperity. Basic Books.