(1) Show graphically the case when interest rate is pro-cyclical. Label axes, curves, equilibriums to earn full credits. (6 points)

(2) When interest rate is pro-cyclical, is bonds price anti-cyclical or pro-cyclical? (1 point)

(3) When interest rate is pro-cyclical, is bonds quantities anti-cyclical or pro-cyclical? (1 point)

(4) The spread between interest rates on corporate bonds and Treasury bonds re?ect the di?erence of two bonds in default risk and liquidity. Between corporate bonds and Treasury bonds: which bonds have less default risk? Which bonds are less liquid? Which bonds have higher prices? Which bonds have higher interest rates? (4 points)

(5) If the federal government guarantees today that it will pay creditors if the corporation goes bankrupt in the future. What will happen to the demand and interest rates on corporations bonds? (2 points)

QUESTION 1: 14 POINTS (1) Show graphically the case when interest rate is pro-cyclical. Label axes, curves, equilibriums to earn full credits. (6 points) (2) When interest rate is pro-cyclical, is bonds price anti-cyclical or pro-cyclical? (1 point) (3) When interest rate is pro-cyclical, is bonds quantities anti-cyclical or pro-cyclical? (1 point)(4) The spread between interwt rates on corporate bonds and Treasury bonds reect the difference of two bonds in default risk and liquidity. Between corporate bonds and Treasury bonds: which bonds have less default risk? Which bond: are less liquid? Which bonds have higher prices? Which bonds have higher interest rates? (4 points) {5) If the federal government guarantees today that it will pay creditors if the corporation goes bankrupt in the future. What will happen to the demand and interest rates on corporations bonds? (2 points)