Exam 2 (FINC514) fully
solved &
updated(latest
verified version)
Chapter 6 - answer Chapter 6
Which tend to be more volatile, short- or long-term
interest rates? - answer Short-term interest rates
If the inflation rate was 3.00% and the nominal interest
rate was 4.60% over the last year, what was the real rate
of interest over the last year? Disregard cross-product
terms; that is, if averaging is required, use the arithmetic
average. - answer The nominal interest rate consists of
the real rate of interest and inflation. In this case, the
nominal interest rate is 4.60%, and the inflation rate is
3.00%.
So the real rate of interest is 4.60% - 3.00% = 1.60%.
Based on your understanding of the determinants of
interest rates, if everything else remains the same, which
of the following will be true?
- The yield on U.S. Treasury securities always remains
static.
,- In theory, the yield on a bond with a longer maturity will
be higher than the yield on a bond with a shorter maturity.
- answer In theory, the yield on a bond with a longer
maturity will be higher than the yield on a bond with a
shorter maturity.
Suppose the real risk-free rate and inflation rate are
expected to remain at their current levels throughout the
foreseeable future. Consider all factors that affect the
yield curve. Then identify which of the following shapes
that the US Treasury yield curve can take. Check all that
apply.
- Inverted yield curve
- Upward-sloping yield curve
- Downward-sloping yield curve - answer - Inverted yield
curve
- Upward-sloping yield curve
- Downward-sloping yield curve
If inflation is expected to decrease in the future and the
real rate is expected to remain steady, then the Treasury
yield curve is downward sloping. (Assume MRP = 0.) -
answer True
The default risk on Walmart's short-term debt will be
higher than the default risk on its long-term debt. -
answer False
,The yield curve for a BBB-rated corporate bond is
expected to be above the US Treasury bond yield curve. -
answer True
Yield curves of highly liquid assets will be lower than yield
curves of relatively illiquid assets. - answer True
The pure expectations theory assumes that a one-year
bond purchased today will have the same return as a one-
year bond purchased five years from now. - answer False
The pure expectations theory assumes that the maturity
risk premium is zero (MRP = 0). This suggests that
investing consecutively in short-term bonds will provide
the same return as a long-term bond.
This premium is added when a security lacks
marketability, because it cannot be bought and sold
quickly without losing value. - answer Liquidity risk
premium (LP)
As interest rates rise, bond prices fall, and as interest
rates fall, bond prices rise. Because interest rate changes
are uncertain, this premium is added as a compensation
for this uncertainty. - answer Maturity risk premium (MRP)
This is the difference between the interest rate on a US
Treasury bond and a corporate bond of the same profile—
that is, the same maturity and marketability. - answer
Default risk premium (DRP)
, This is the rate on short-term US Treasury securities,
assuming there is no inflation. - answer Real risk-free rate
(r*)
Over the past several years, Germany, Japan, and
Switzerland have had lower interest rates than the United
States due to lower values of this premium. - answer
Inflation premium (IP)
It is calculated by adding the inflation premium to r*. -
answer Nominal risk-free rate (Rrf)
Countries with strong balance sheets and declining budget
deficits tend to have lower interest rates. - answer True
If the Fed injects a huge amount of money into the
markets, inflation is expected to decline, and long-term
interest rates are expected to rise. - answer False
During the credit crisis of 2008, investors around the
world were fearful about the collapse of real estate
markets, shaky stock markets, and illiquidity of several
securities in the United States and several other nations.
The demand for US Treasury bonds increased, which led to
a rise in their price and a decline in their yields. - answer
True
The Federal Reserve's ability to use monetary policy to
control economic activity in the United States is limited
solved &
updated(latest
verified version)
Chapter 6 - answer Chapter 6
Which tend to be more volatile, short- or long-term
interest rates? - answer Short-term interest rates
If the inflation rate was 3.00% and the nominal interest
rate was 4.60% over the last year, what was the real rate
of interest over the last year? Disregard cross-product
terms; that is, if averaging is required, use the arithmetic
average. - answer The nominal interest rate consists of
the real rate of interest and inflation. In this case, the
nominal interest rate is 4.60%, and the inflation rate is
3.00%.
So the real rate of interest is 4.60% - 3.00% = 1.60%.
Based on your understanding of the determinants of
interest rates, if everything else remains the same, which
of the following will be true?
- The yield on U.S. Treasury securities always remains
static.
,- In theory, the yield on a bond with a longer maturity will
be higher than the yield on a bond with a shorter maturity.
- answer In theory, the yield on a bond with a longer
maturity will be higher than the yield on a bond with a
shorter maturity.
Suppose the real risk-free rate and inflation rate are
expected to remain at their current levels throughout the
foreseeable future. Consider all factors that affect the
yield curve. Then identify which of the following shapes
that the US Treasury yield curve can take. Check all that
apply.
- Inverted yield curve
- Upward-sloping yield curve
- Downward-sloping yield curve - answer - Inverted yield
curve
- Upward-sloping yield curve
- Downward-sloping yield curve
If inflation is expected to decrease in the future and the
real rate is expected to remain steady, then the Treasury
yield curve is downward sloping. (Assume MRP = 0.) -
answer True
The default risk on Walmart's short-term debt will be
higher than the default risk on its long-term debt. -
answer False
,The yield curve for a BBB-rated corporate bond is
expected to be above the US Treasury bond yield curve. -
answer True
Yield curves of highly liquid assets will be lower than yield
curves of relatively illiquid assets. - answer True
The pure expectations theory assumes that a one-year
bond purchased today will have the same return as a one-
year bond purchased five years from now. - answer False
The pure expectations theory assumes that the maturity
risk premium is zero (MRP = 0). This suggests that
investing consecutively in short-term bonds will provide
the same return as a long-term bond.
This premium is added when a security lacks
marketability, because it cannot be bought and sold
quickly without losing value. - answer Liquidity risk
premium (LP)
As interest rates rise, bond prices fall, and as interest
rates fall, bond prices rise. Because interest rate changes
are uncertain, this premium is added as a compensation
for this uncertainty. - answer Maturity risk premium (MRP)
This is the difference between the interest rate on a US
Treasury bond and a corporate bond of the same profile—
that is, the same maturity and marketability. - answer
Default risk premium (DRP)
, This is the rate on short-term US Treasury securities,
assuming there is no inflation. - answer Real risk-free rate
(r*)
Over the past several years, Germany, Japan, and
Switzerland have had lower interest rates than the United
States due to lower values of this premium. - answer
Inflation premium (IP)
It is calculated by adding the inflation premium to r*. -
answer Nominal risk-free rate (Rrf)
Countries with strong balance sheets and declining budget
deficits tend to have lower interest rates. - answer True
If the Fed injects a huge amount of money into the
markets, inflation is expected to decline, and long-term
interest rates are expected to rise. - answer False
During the credit crisis of 2008, investors around the
world were fearful about the collapse of real estate
markets, shaky stock markets, and illiquidity of several
securities in the United States and several other nations.
The demand for US Treasury bonds increased, which led to
a rise in their price and a decline in their yields. - answer
True
The Federal Reserve's ability to use monetary policy to
control economic activity in the United States is limited
