Exam 3: Structure of Interest Rates

The forward rate is commonly used to represent the market's forecast of the future interest rate.

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ____ pressure on the demand for short-term funds by borrowers and the yield curve will be ____ sloping.

A downward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.

The segmented markets theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it.

All other characteristics being equal, securities with ____ liquidity would have to offer a ____ yield to be preferred.

If issuers of securities (borrowers)and investors suddenly expect interest rates to decrease, their actions to benefit from their expectations should cause

If interest rates are expected to decrease, the yield on new short-term securities may be expected to ____, and the yield curve should be ____ sloping.

A firm in the 20 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent. To match this yield, taxable securities must offer a before-tax yield of

In general, securities with ____ characteristics will offer ____ yields.

The term structure of interest rates defines the relationship between maturity and annualized yield, holding other factors such as risk constant.

If liquidity influences the yield curve, but is not considered when deriving the forward interest rate, the forward interest rate ____ the market's expectation of the future interest rate.

An upward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.

Treasury securities are exempt from federal and state income taxes.

The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate one year ahead is ____ percent.

The yield curve in a foreign country is

Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market, they may cause the yield curve to

If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting ____ in interest rates.

The higher a bond rating, the lower the perceived credit risk.

Bonds issued at different times by the same corporation may not receive the same rating from a rating agency.

The theory for the term structure of interest rates that says the shape of the yield curve is determined solely by expectations of future interest rates is called the