Exam 2 (FINC514) Review QUESTIONS AND ALL
CORRECT ANSWERS 100% SOLVED AND
GUARANTEED SUCCESS!!
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
CORRECT ANSWERS 100% SOLVED AND
GUARANTEED SUCCESS!!
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
