1. Explain how the bond market facilitates a government’s fiscal policy.

How do you think the bond

market could discipline a government and discourage the government from borrowing (and
spending) excessively?

Whether its corporations or government, they both need money to conduct their normal operations.
And just like any other financing, bonds are also one source of financing. The bond market helps the
treasury departmen.

2. Explain what exchange-traded notes are and how they are used. Why are they risky?
a. Exchange-traded notes (ETNs) are types of unsecured debt
securities that track an underlying index of securities and trade on a
major exchange like a stock. ETNs are similar to bonds but do not
pay interest payments. Instead, the prices of ETNs fluctuate like
stocks.
b. At maturity, the ETN will pay the return of the index it tracks.
However, ETNs do not pay any interest payments like a bond. When
the ETN matures, the financial institution takes out fees, then gives
the investor cash based on the performance of the underlying index.
Since ETNs trade on major exchanges like stocks, investors can buy
 and sell ETNs and make money from the difference between the
purchase and sale prices minus any fees. ETNs are different
than exchange-traded funds (ETFs). ETFs own the securities in the
index they track. For example, an ETF that tracks the S&P 500 will
own all 500 stocks in the S&P. ETNs do not provide investors
ownership of the securities but are merely paid the return that the
index produces. As a result, ETNs are similar to debt securities. The
investors must trust that the issuer will make good on the return
based on the underlying index.

Cons

3. Exchange-traded notes don't make regular interest payments.

4. ETNs have default risk since the repayment of principal is contingent on
the issuer's financial viability.
5. Trading volume can be low causing ETN prices to trade at a premium.
6. Tracking errors can occur if the ETN doesn't track the underlying index
closely.
a.
7. What does this mean? Interpret the statement below.
“The values of some stocks are depended on the bond market. When investors are not
interested in junk bonds, the values of stocks ripe for leveraged buyouts decline.”

8. An insurance company purchased bonds issued by Hartnett Company two years ago. Today,
Hartnett Company has begun to issue junk bonds and is using the funds to repurchase most of
its existing stock. Why might the market value of those bonds held by the insurance company be
affected in this situation?
9. PROBLEMS:
a. An inflation-indexed Treasury bond has a par value of $1.00 and a coupon rate of 6
percent. An investor purchases this bond and holds it for one year. During the year, the
consumer price index increases by 1 percent every six months. What are the total
interest payments the investor will receive during the year?
10.

a. Assume that the US economy experience deflation during the year and that the
consumer price index decreased by 1 percent in the first six months of the year, and by
2 percent during the second six months of the year. If an investor had purchased
inflation-indexed Treasury bonds with a par value of $10,000 and a coupon rate of 5
percent, how much would she have received in interest during the year?