Exam 7: The Risk and Term Structure of Interest Rates

Please use the graphs to show what happens to the risk (yield) differential in each situation and why. Assume the corporate and Treasury bonds have the same maturity; a) If the corporate bonds are default-risk free, what could you tell about the price and yields of each? b) If the corporate bonds are now viewed as having the possibility of default, what happens in each market? c) If the corporate bonds are granted tax-exempt status, what happens in each market? d) If the corporate bonds have a longer maturity than the Treasury bonds what would happen?

Suppose the tax rate is 25% and the taxable bond yield is 8%. What is the equivalent tax-exempt bond yield?

Assume an investor has a choice of 3 consecutive one-year bonds or one 3-year bond. Assuming the expectations hypothesis of the term structure of interest rates is correct the:

A company that continues to have strong profit performance during an economic downturn when many other companies are suffering losses or failing should see:

Bonds rated as "highly speculative" are:

Assume the Expectation Hypothesis regarding the term structure of interest rates is correct. Then, if the current one-year interest rate is 4% and the two-year interest rate is 6%, then investors are expecting the future one-year rate to be:

According to the expectations hypothesis:

The expectations hypothesis cannot explain why:

The risk premium that investors associate with a bond increases with all of the following except:

Why might we expect to see a high correlation between increases in the risk structure of interest rates and the yield curve becoming inverted?

What impact should an economic slowdown have on the risk structure of interest rates?

As technology allows information regarding the financial health of corporations to become easier to obtain, we should expect:

Under the liquidity premium theory a flat yield curve implies:

An investor sees the current twelve-month rate at 4% and expects the following future twelve-month rate for each of the subsequent years; 4.5%, 5.5% and 6.0%. If this investor views a four-year maturity at 5.65% as equal to four consecutive one-year securities, what is his/her risk premium?

Most commercial paper is:

The addition of the liquidity premium theory to the expectations hypothesis allows us to explain why:

The presence of a term spread that is usually positive indicates that:

We have heard the predictions regarding the large number of people that will be retiring over the next 25-50 years and the strain this is going to place on the federal budget. Assuming that federal borrowing will have to increase, what is the likely impact going to be on the risk and term structure (if any) of interest rates and why?

The slope of the yield curve seems to predict the performance of the economy usually:

The expectations hypothesis assumes: