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Question 36 Not yet answered Marked out of 10,00 Flag question Sentiment Indicators: Behavioral Finance devotes considerable attention to market sentiment which may be interpreted as the general level of optimism among investors. Technical analysts have devised several measures of sentiment among which is confidence Index Barron's computes a confidence index using data from the bond market. The presumption is that actions of bond traders reveal trends that will emerge soon in the stock market. The confidence index is the ratio of the average yield on 10 top-rated corporate bonds divided by the average yield on 10 intermediate grade corporate bonds. The ratio will always be below 1 because higher rated bonds will offer lower promised yields to maturity. When bond traders are optimistic about the economy; however, they might require smaller default premiums on lower rated debt. Hence, the yield spread will narrow, the confidence index will approach 1. Therefore higher values of the confidence index are bullish signals. At the end of July, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 5% and 7%, respectively. At the end of August, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 9% and 10%, respectively. Explain ( need to see the entire solution): A) whether the confidence index increased or decreased during August B) whether bond technical analysts are likely to be bullish or bearish on the stock. B 1 FF T: A Question 36 Not yet answered Marked out of 10,00 Flag question Sentiment Indicators: Behavioral Finance devotes considerable attention to market sentiment which may be interpreted as the general level of optimism among investors. Technical analysts have devised several measures of sentiment among which is confidence Index Barron's computes a confidence index using data from the bond market. The presumption is that actions of bond traders reveal trends that will emerge soon in the stock market. The confidence index is the ratio of the average yield on 10 top-rated corporate bonds divided by the average yield on 10 intermediate grade corporate bonds. The ratio will always be below 1 because higher rated bonds will offer lower promised yields to maturity. When bond traders are optimistic about the economy; however, they might require smaller default premiums on lower rated debt. Hence, the yield spread will narrow, the confidence index will approach 1. Therefore higher values of the confidence index are bullish signals. At the end of July, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 5% and 7%, respectively. At the end of August, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 9% and 10%, respectively. Explain ( need to see the entire solution): A) whether the confidence index increased or decreased during August B) whether bond technical analysts are likely to be bullish or bearish on the stock. B 1 FF T: A

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