Exam 3: Structure of Interest Rates

Some types of debt securities always offer a higher yield than others.

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.

Treasury securities are exempt from federal and state income taxes.

If a yield curve is upward sloping, the investment strategy of buying long-term securities, then selling them after a short period (say, one year) is called

Assume that today, the annualized two-year interest rate is 12 percent, and the one-year interest rate is 9 percent. A three-year security has an annualized interest rate of 14 percent. Whatisthe one-year forward rate two years from now?

If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield curve should be

If research showed that anticipation about future interest rates was the only important factor for all investors in choosing short-term or long-term securities, this would support the argumentmade by the

Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to

A flat or inverted yield curve is most commonly interpreted to signal that that the economy will strengthen in the near future and that interest rates will rise.

Assume that the Treasury bond yield today is 2 percentage points higher than it was one year ago. Also assume that the credit (default) risk premium of an A-rated bond declined by 0.4 percentagepoint since one year ago. A newly issued A-rated bond will likely offer a yield today that is ____ the yield that was offered on an A-rated bond issued one year ago.

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

If all other characteristics are similar, ____ would have to offer ____.

When expectations theory is combined with the liquidity theory, the yield on a security will always be equal to the yield from consecutive investments in shorter-term securities over the sameinvestment horizon.

Investors will always prefer the purchase of risk-free Treasury securities, since other securities have a higher level of risk.

The yield offered on a debt security is related to the prevailing risk-free rate and related to the security's risk premium.

Investment-grade bonds are bonds that are rated as Caa or better by Moody's and as CCC or better by Standard & Poor's.

Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of T-bills. This action will ____ the supply of T-bills in the market and place ____ pressure on the yield of T-bills.

The degree to which the Treasury's debt management policy could affect the term structure of interest rates is greatest if

A firm in the 35 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

If the Treasury uses a relatively large proportion of ____ debt to finance a budget deficit, this would place ____ pressure on long-term yields.