Answer the following discussion questions with ref.
In the early 1980s, interest rates on long-term debt were at remarkable levels – above 15% with some even higher. Within a decade, rates had dropped precipitously. I have a couple of questions about that:
1.What would the effect of a decline in interest rates on those instruments have on their price?
2.What impact would that decline have on other financial instruments? (Mortgages, Money Market Instruments, Stock)
3.What does the change in prices after a significant change in interest rates say about the relationship of price and interest rates?
4.Most of the bonds that had been issued in the early 1980s were no longer on the market by the mid-1990s. Why do you suppose that is?
What is arbitrage?. There is some controversy about whether or not arbitrage has a destabilizing effect on exchange rates. Does arbitrage have a destabilizing effect on exchange rates or doesn’t it? Please back up your opinion.