ECO 4223 Money & Banking Exam 2; Questions and Answers 100% Solved

ECO 4223 Money & Banking Exam 2; Questions and Answers 100% Solved Risk Structure of Interest rate The relationship among the various interest rates on bonds with the same term to maturity. e.g: A 10yr bond from Coca Cola vs. a 10yr bond from ABC Inc. Factors include: Default Risk; Liquidity; Taxes Default Risk The risk that the issuer may not be able to honor a bond. The issuer can not make interest payments or pay face value at maturity Risk Premium The difference between investmenting in a risky asset and a risk-free investment. Liquidity is also a factor. The less liquid assets have a higher premium. Example of Risk Premium T-Bill = 3% Coke = 5% There is a 2% Risk Premium on the Coke bond because it has more risk than the T-Bil