Exam 6: The Structure of Interest Rates

Everything else the same, the higher the marginal tax rate of an investor, the more likely the investor is to invest in municipal bonds as opposed to similarly rated corporate bonds.

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Which of the following statements about interest rates is true?

With reference to the above data, at what marginal tax rate would an investor be indifferent between owning the corporate bond and the municipal bond?

The relationship between maturity and yield to maturity is called the ________________.

With reference to the data above, what is the one-year forward rate on Treasury securities two years from now according to the expectations theory?

Define the term default risk premium. Why does the "premium" represent the "expected default loss rate"? Explain how and why default risk premiums vary over the business cycle.

Which of the following theories of the term structure of interest rates best explains discontinuities in the yield curve?

Explain how the term structure of interest rates can be used to help forecast future interest rates.

The shape of the yield curve is determined by expectations of changes in future interest rates.

A bondholder in the 30 percent tax bracket owns a $1000 Treasury bond with an 8 percent coupon rate. What is the after-tax return on the bond?

Liquidity premiums cause an observed yield curve to be less upward sloping than that predicted by the expectations theory.

According to the expectations theory of the term structure of interest rates, if the yield curve slopes _______, the markets expect short-term interest rates to _______ in the future

The slope of the yield curve is affected by

A downward sloping yield curve forecasts higher future interest rates.

With reference to the data above, at what tax rate would an investor be indifferent between holding the 3-year municipal or 3-year corporate bond?

Which of the following statements explains the liquidity premium theory of the term structure of interest rates?

With reference to the above data, what is the approximate expected pre-tax real rate of return on the one-year Treasury bill?

Investment-grade bonds are more likely to default than speculative-grade bonds.

The less marketable a security, the higher its yield.