Exam 3: Structure of Interest Rates

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

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

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.

The graphic comparison of maturities and annualized yields is known as the interest rate curve.

According to the pure expectations theory of the term structure of interest rates, the ____ the difference between the implied one-year forward rate and today's one-year interest rate, the ____ is the expected change in the one-year interest rate.

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.

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, then the one-year forward rate is

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

The yield curve in a foreign country is

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 argument made by the

Default risk is likely to be highest for

According to pure expectations theory, if interest rates are expected to decrease, there will be ____ pressure on the demand for short-term funds by borrowers and ____ pressure on the demand for long-term funds issued by borrowers.

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

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

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.What is the one-year forward rate two years from now?

Interest income from municipal bonds is exempt from state taxes but is subject to federal taxes.

If the Treasury uses a relatively large proportion of ____ debt to finance the deficit, this may place upward pressure on ____ interest rates, and corporations may reduce their investment in fixed assets.

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.

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

Vaughn Corporation is considering the issue of commercial paper and would like to know the yield it should offer on its commercial paper.The corporation believes that a 0.2 percent default risk premium, a 0.1 percent liquidity premium, and a 0.3 percent tax adjustment are necessary to sell its commercial paper to investors.Furthermore, annualized T-bill rates are 7 percent.Based on this information, Vaughn should offer ____ percent on its commercial paper.