Question 1

List the five basic factors which explain the differences in interest rates on different securities at any point in time.

Accepted Answer

The five basic factors which may explain yield differences include term to maturity, default risk, tax treatment of income of security, marketability, and call, put, or conversion options attached to the security.

Question 2

The market segmentation theory assumes that investors are risk-neutral.

Accepted Answer

A) True 
 B)False  False

Question 3

The major reason that municipal bonds have lower yields than corporate bonds is that, as a class, municipal debt has less marketability than corporate debt.

Accepted Answer

A) True 
 B)False  False

Question 4

The yield curves show the relationship between interest rates on bonds similar in terms except for maturity.

Accepted Answer

A) True 
 B)False

Question 5

Explain (a.) liquidity differences in different types of bonds, (b.) default risk, and (c.) maturity risk premiums.

Accepted Answer

a. Liquidity problems exist in infrequen

Question 6

Ceteris paribus, the required interest rate of a callable bond will be higher than the interest rate on a convertible bond.

Accepted Answer

A) True 
 B)False

Question 7

A convertible bond will generally have a higher market yield relative to similar nonconvertible bonds.

Accepted Answer

A) True 
 B)False

Question 8

The pure expectations theory maintains that long term rates are averages of expected futureshort term rates.

Accepted Answer

A) True 
 B)False

Question 9

Treasury and corporate security yields are often combined on the same yield curve.

Accepted Answer

A) True 
 B)False

Question 10

How do bond options such as a call, put, and convertibility influence the yields on securities relativeto bonds without such options?

Accepted Answer

Options in bond contracts are valuable f

Question 11

A downward sloping yield curve forecasts higher future interest rates.

Accepted Answer

A) True 
 B)False

Question 12

The less marketable a security, the higher its yield.

Accepted Answer

A) True 
 B)False

Question 13

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.

Accepted Answer

The default risk premium, the difference

Question 14

The market segmentation theory allows for the possibility of a discontinuous yield curve.

Accepted Answer

A) True 
 B)False

Question 15

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.

Accepted Answer

A) True 
 B)False

Question 16

Callable bonds have higher market yields than otherwise similar noncallable bonds.

Accepted Answer

A) True 
 B)False

Question 17

An investor in the 33 percent tax bracket should buy a 6 percent municipal bond rather than a similarly rated 8.5 percent corporate bond.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

A put option sets a "floor" or minimum price of a bond at the exercise price, which is generally at or above par value.

Accepted Answer

A) True 
 B)False

Question 20

What shapes of the yield curve can be explained by each of the theories of the term structure of interest rates?

Accepted Answer

Different theories of the term structure

List the five basic factors which explain the differences in interest rates on different securities at any point in time.

The market segmentation theory assumes that investors are risk-neutral.

The major reason that municipal bonds have lower yields than corporate bonds is that, as a class, municipal debt has less marketability than corporate debt.

The yield curves show the relationship between interest rates on bonds similar in terms except for maturity.

Explain (a.) liquidity differences in different types of bonds, (b.) default risk, and (c.) maturity risk premiums.

Ceteris paribus, the required interest rate of a callable bond will be higher than the interest rate on a convertible bond.

A convertible bond will generally have a higher market yield relative to similar nonconvertible bonds.

The pure expectations theory maintains that long term rates are averages of expected futureshort term rates.

Treasury and corporate security yields are often combined on the same yield curve.

How do bond options such as a call, put, and convertibility influence the yields on securities relativeto bonds without such options?

A downward sloping yield curve forecasts higher future interest rates.

The less marketable a security, the higher its yield.

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.

The market segmentation theory allows for the possibility of a discontinuous yield curve.

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.

Callable bonds have higher market yields than otherwise similar noncallable bonds.

An investor in the 33 percent tax bracket should buy a 6 percent municipal bond rather than a similarly rated 8.5 percent corporate bond.

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

A put option sets a "floor" or minimum price of a bond at the exercise price, which is generally at or above par value.

What shapes of the yield curve can be explained by each of the theories of the term structure of interest rates?

An Overview of Financial Markets and Institutions

The Federal Reserve and Its Powers

The Fed and Interest Rates

The Level of Interest Rates

Bond Prices and Interest Rate Risk

Money Markets 1

Bond Markets

Mortgage Markets and Mortgagebacked Securities

Equity Markets

Derivatives Markets

International Markets

Commercial Bank Operations

International Banking

Regulation of Financial Institutions

Thrift Institutions and Finance Companies

Insurance Companies and Pension Funds

Investment Banking

Investment Companies

Risk Management in Financial Institutions

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Exam 6: The Structure of Interest Rates

List the five basic factors which explain the differences in interest rates on different securities at any point in time.

The market segmentation theory assumes that investors are risk-neutral.

The major reason that municipal bonds have lower yields than corporate bonds is that, as a class, municipal debt has less marketability than corporate debt.

The yield curves show the relationship between interest rates on bonds similar in terms except for maturity.

Explain (a.) liquidity differences in different types of bonds, (b.) default risk, and (c.) maturity risk premiums.

Ceteris paribus, the required interest rate of a callable bond will be higher than the interest rate on a convertible bond.

A convertible bond will generally have a higher market yield relative to similar nonconvertible bonds.

The pure expectations theory maintains that long term rates are averages of expected futureshort term rates.

Treasury and corporate security yields are often combined on the same yield curve.

How do bond options such as a call, put, and convertibility influence the yields on securities relativeto bonds without such options?

A downward sloping yield curve forecasts higher future interest rates.

The less marketable a security, the higher its yield.

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.

The market segmentation theory allows for the possibility of a discontinuous yield curve.

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.

Callable bonds have higher market yields than otherwise similar noncallable bonds.

An investor in the 33 percent tax bracket should buy a 6 percent municipal bond rather than a similarly rated 8.5 percent corporate bond.

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

A put option sets a "floor" or minimum price of a bond at the exercise price, which is generally at or above par value.

What shapes of the yield curve can be explained by each of the theories of the term structure of interest rates?

An Overview of Financial Markets and Institutions

The Federal Reserve and Its Powers

The Fed and Interest Rates

The Level of Interest Rates

Bond Prices and Interest Rate Risk

Money Markets 1

Bond Markets

Mortgage Markets and Mortgagebacked Securities

Equity Markets

Derivatives Markets

International Markets

Commercial Bank Operations

International Banking

Regulation of Financial Institutions

Thrift Institutions and Finance Companies

Insurance Companies and Pension Funds

Investment Banking

Investment Companies

Risk Management in Financial Institutions

Filters