Exam 7: The Risk and Term Structure of Interest Rates

Under the expectations hypothesis of the term structure of interest rates, explain the impact of a U.S. Treasury decision to phase out the 30-year bond and to only focus on 3-month, 1-year, 5-year and 10-year bonds?

The U.S. Treasury yield curve:

Tax-exempt bonds:

Once a bond rating is assigned, it:

What is meant by a subprime mortgage?

Suppose that the Federal Reserve is concerned about rising inflation, so they increase short- term interest rates. How will this affect long-term rates and the yield curve? What does the slope of the yield curve reveal about the effectiveness of the Fed's policy? Explain in the context of the Liquidity Premium Theory.

Which fact about the term structure is the expectations theory unable to explain?

U.S. Treasury securities are considered to carry no risk spread because:

Assuming the expectations hypothesis is correct, and given the following information: The current four-year interest rate is 5.0% The current one-year interest rate is 4.0% The expected one-year rate for one year from now is 5.0% The expected one-year rate for two years from now is 5.5% What is the expected one-year rate for three years from now? Explain.

How did asset backed commercial paper (ABCP) rollover risk contribute to the financial crisis of 2007-2009?

Using the information provided and the expectations hypothesis, compute the yields for a two-year, three-year, and four-year bonds. Now, suppose there is a risk premium attached to each bond. These risk premiums are given in the table below: Using the information above and the liquidity premium theory, compute the yields for a two- year, three-year, and four-year bonds. How does this yield curve compare to the one you computed using the expectations hypothesis?

The lowest rating for an investment grade bond assigned by Moody's is:

Briefly describe the two different types of junk bonds (high-yield bonds).

What is the effective after-tax yield to an investor from a bond paying $70 per $1,000 annually, if the investor is in a 25% marginal tax bracket? Explain.

The expectations hypothesis assumes each of the following, except:

If a bond's rating improves it should cause the bond's price:

Bonds issued by the U.S. Treasury are referred to as benchmark bonds because:

If their only concern were the cost of issuing municipal debt, how would you expect the mayors of most U.S. cities to respond to a revenue-neutral change in the federal income tax that sharply lowered the top marginal tax rate?

A flight to quality should result in the:

Why do yield curves usually slope upward?