Corp Finance Exam With Complete Solutions
Interest Rate Structure - An yield curve - that indicates the relative level of short-term
and long-term interest rates.
U.S. government securities are attractive since they carry no default risks
Corporate debt securities require a higher interest rate since there are more financial
risks
Yield curves for the two securities shift every day to reflect changes in:
Current competitive conditions
Expected inflation
Changes in economic conditions
Hedging - Solution Making an investment to reduce the risk of adverse price movements
in an asset. Normally, a hedge consists of taking an offsetting position in a related
security, such as a futures contract.
Insurance policy
Yield Curve Theories - Solution Liquidity premium theory:
Long-term rates should be higher than short-term rates
Market segmentation theory:
Treasury securities are segmented into market sectors by the different financial
institutions investing in the market
Expectations hypothesis:
Yields on long-term securities is a function of short-term rates
Commercial Paper - Answer Adv
1) It is quick and cost effective way of raising working capital.
Interest Rate Structure - An yield curve - that indicates the relative level of short-term
and long-term interest rates.
U.S. government securities are attractive since they carry no default risks
Corporate debt securities require a higher interest rate since there are more financial
risks
Yield curves for the two securities shift every day to reflect changes in:
Current competitive conditions
Expected inflation
Changes in economic conditions
Hedging - Solution Making an investment to reduce the risk of adverse price movements
in an asset. Normally, a hedge consists of taking an offsetting position in a related
security, such as a futures contract.
Insurance policy
Yield Curve Theories - Solution Liquidity premium theory:
Long-term rates should be higher than short-term rates
Market segmentation theory:
Treasury securities are segmented into market sectors by the different financial
institutions investing in the market
Expectations hypothesis:
Yields on long-term securities is a function of short-term rates
Commercial Paper - Answer Adv
1) It is quick and cost effective way of raising working capital.
