Exam 8: The Risk Structure of Interest Rates: Defaults, Prepayments, Taxes, and Other Rate-Determining Factors

According to the 2001 Economic Growth and Tax Relief Reconciliation Act, individuals with employer or business-related retirement plans (Keoghs or 401ks) can increase their annual contributions to these retirement plans from $10,500 in 2001 to, eventually, $15,000 by the year 2006.

A major part of the 1997 Taxpayer Relief Act was to reduce capital gains tax rates for short-term capital gains, in order to stimulate investment.

Between 2003 in the end of 2006 the difference between long-term interest rates on corporate bonds, Baa and the 10 year US treasury notes has decreased to around 2 ½ percent.

Moody's Investor Service and Standard and Poor's Corporation are two of the most widely consulted investment rating companies in the U.S.

An investor purchases a 10-year U.S. Government bond for $800. The bond's coupon rate is 10 percent and it has 5 years remaining until maturity. If the investor holds the bond to maturity and collects the bond's $1,000 par value and has a marginal income-tax rate of 28 percent, what will his after-tax yield to maturity be?

What do we mean by the term interest rate structure? What does the structure of interest rates tell us about the difficulties involved in trying to forecast movements in interest rates?

One of the following statements below is incorrect. Which one? (Consider each statement by itself without reference to the other statements.)

Credits swaps cannot be used to diversify risk.

What is meant by the term event risk? What factors appear to contribute to an increase in a corporation's stock price? A decrease in its stock price?

When agency ratings on securities are different, the accepted practice is to take the highest rating or the second highest rating.

The Jobs And Growth Tax Relief Reconciliation Act of 2004 set the capital gains tax to

Between 2003 in the end of 2006 the difference between long-term interest rates on corporate bonds, Baa and the 10 year US treasury notes has decreased to around 8 percent.

What portion of the income generated by municipal bonds is considered tax-exempt and what portion is taxable income? Why do you think United States' laws are structured in this way?

For financial losses that individual taxpayers incur, the current federal law

Loan-backed securities pay their purchasers a stream of income that includes both repayments of loan principal and interest.

What is the relationship between marketability and the yield on a financial instrument?

Call privileges on bonds are a disadvantage to investors precisely because the price of the callable bonds may decline.

What is a call privilege? Why is this privilege an advantage to a security issuer and a disadvantage to a buyer of financial instruments?

According to the 2001 Economic Growth and Tax Relief Reconciliation Act,

The maximum possible amount of capital loss that can be deducted for tax purposes is $3,000.