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?

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Step 1 - Calculate the price of the bonds before and after the expected change in interest rates, and find the difference. P_bond = C × 11ea7fdb_fc03_2044_a768_7354fc8f7b1b_TB2902_11 + 11ea7fdb_fc03_2045_a768_058c02b8efa5_TB2902_11 P_{new 4%} = 32.5 × 11ea7fdb_fc03_2046_a768_8f4489500e41_TB2902_11 + 11ea7fdb_fc03_4757_a768_5743a4c41ab8_TB2902_11 = $939.17 P_{old 5%} = 32.5 × 11ea7fdb_fc03_4758_a768_fdb8599dc968_TB2902_11 + 11ea7fdb_fc03_4759_a768_5bb8b0a9d24a_TB2902_11 = $864.87 939.17 - 864.87 = 74.30 Step 2 - Determine how many bonds you need to profit $5,000. 11ea7fdb_fc03_475a_a768_f9c6b235d83b_TB2902_11 = 67.29 Since interest rates will fall, bond prices will rise, so you should buy 67 bonds.

The Economy Is Slowing and Many Forecasters Predict a Recession