Exam 3: Structure of Interest Rates

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 same investment horizon.

Treasury securities are exempt from federal and state income taxes.

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

Default risk is likely to be highest for

Holding other factors such as risk constant, the relationship between the maturity and annualized yield of securities is called the

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

If a security can easily be converted to cash without a loss in value, it

In response to criticism of the ratings they assigned before the credit crisis, credit rating agencies now:

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

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

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

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

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 yield curve is upward sloping, some investors may attempt to benefit from the higher yields on longer-term securities, even when they have funds for only a short period of time. This strategy is known as riding the yield curve.

Assume that the Treasury experiences a large increase in the budget deficit and issues 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.

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.

Credit ratings are most commonly used to indicate which financial institutions have available funds that they can lend to borrowers.

You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You are in the 28 percent tax bracket. To match this after-tax yield, you would consider taxable securities that pay

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

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 ahead is ____ percent.