Exam 3: Structure of Interest Rates

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.

If liquidity influences the yield curve, the forward rate underestimates the market's expectation of the future interest rate.

Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, thentheone-year forward rate is

The yield curve in a foreign country is

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 two years aheadis ____ percent.

Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate accordingto the pure expectations theory?

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 aheadis____ percent.

The yield curve for corporate bonds

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

If research showed that all investors attempt to purchase securities that perfectly match the time for which they will have available funds, this would specifically support the argument madebythe

An investor's tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax yield of 11 percent?

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 long-term fundsissued by borrowers and the yield curve will be ____ sloping.

According to the segmented markets theory, the term structure of interest rates is determined solely by expectations of future interest rates.

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

Some financial institutions such as commercial banks typically invest only in

According to the liquidity premium theory, the expected yield on a two-year security will ____ the expected yield from consecutive investments in one-year securities.

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 fundsbyborrowers and the yield curve will be ____ sloping.

The yields of securities commonly move in the same direction over time.

The theory of the term structure of interest rates, which states that investors and borrowers choose securities with maturities that satisfy their forecasted cash needs, is the

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