Suppose Baarated bonds currently yield 6 while Aarated bonds

Suppose Baa-rated bonds currently yield 6%, while Aa-rated bonds yield 5%. Suppose that due to an increase in the expected inflation rate, the yields on both bonds increase by 1%. What would happen to the confidence index? Would this be interpreted as bullish or bearish by a technical analyst? Does this make sense to you?

Solution

Initial Confidence Index = 5/6 = 0.833 Modified Confidence Index = 6/7 = 0.85 An increase in confidence index denotes a BULLISH interpretation by technical analyst.

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