Assuming annual interest payments, what is the value of a 5-year 6.2% coupon bond when the discount rate is: (i) 4.5%, (ii) 6.2%, and (iii) 7.3%?

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Remember events that were seen:

  • Fall in oil prices caused fall in inflation.
  • Pandemic led to economic crisis and necessary stimulus from ECB to engage economy.
  • Inflation in March at 0,7% fell to to 0,4% in April.

Decisions made:

  1. the interest rates on MRO and the interest rates on the marginal lending and deposit facilities will remain unchanged at 0.00%, 0.25%, and -0.50% respectively
      1. they expect the interest rates to remain unchanged or to be lowered until inflation outlook converges to a level close to 2%.
  1. It will continue its PEPP (Pandemic Emergency Purchasing Program) - €1,350 billion - until June 2021. Its objetive is to offset the harm the pandemic could have on the path to price stability. 
  2. Continue its Asset Pruchase Programs (QE) investing at a monthly rate of €20 billion, with the additoinal €120 billion temporary envelope. It plans to end these asset purchase program when they begin to raise the key ECB rates.
  3. Will continue to offer liquidity transactions through refinancing operations, in particular, Targeted long-term refinancing operations (third series - TLTRO III - targeted specifically at banks) for banks. This will support bank lending to firms and households. So far, they had been successful. Reminder that these transactions had a favourable interest rate (50 basis points less)


In view of the economic fallout from the resurgence of the virus (second drastic wave), The Governing Council recalibrated its monetary policiy:

  1. Interest rates will be maintained at their respective levels, 0.00% MRO, 0.25% marginal lending facility, and -0.50% Deposit facility. 
  2. They decided to increase the envelope of €1,350 billion by 500 million to €1,850 billion, and extended the horizon to a least March 2022.
  3. They have decided to extend the period of availability of the TLTRO III for another year - to June 2022. They have also decided to increase the amount they are entitled to borrow by 5% (55% of eligble loans) to sustain bank lending. They will carry out three addtional operations (June, Sept, December)
  4. Has decided to offer four addtional Pandemic Emergency Long-Term Refinancing Operations (PELTROs) in 2021.
  5. QE will continue at the same monthly pace of €20 billion every month. It will contue to reinvest the principal amount of maturing securities for an extended amount past the date the ECB raises i.R.

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