Exam 6: The Structure of Interest Rates

Default risk premiums are usually smaller during periods of high economic growth.

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

Expected lower rates of inflation in the future will lead to an upward sloping yield curve.

A downward sloping yield curve is typically seen just before an economic expansion.

According to the preferred habitat theory, investors may change their preferred maturity in response to expected yield premiums.

Explain the four theories of the term structure.

Putable bonds offer higher yields than similar non-putable bonds

If interest rates are expected to increase in the future, one would expect to see an upward sloping yield curve.

The preferred habitat theory explains the existence of forecasts in the yields curve.

An inverted yield curve forecasts higher short-term rates in the future.

Bonds rated BBB would have lower yields than AAA-rated bonds, and higher prices, everything else the same.

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

The call price of a bond is usually below the bond's par value.