Exam 3: Structure of Interest Rates

The ____ 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.

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.

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?

Other things equal, the yield required on A-rated bonds should be ____ the yield required on B-rated bonds whose other characteristics are exactly the same.

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

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 places ____ pressure on the yield of T-bills.

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

According to segmented markets theory, if investors have mostly short-term funds available and borrowers want long-term funds, there would be ____ pressure on the supply of short-term funds provided by investors and ____ pressure on the yield of long-term securities.

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

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

Treasury securities are exempt from federal and state income taxes.

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

Which of the following is not a characteristic affecting the yields on debt securities?

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.

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

Assume that the Treasury bond yield today is 2% higher than it was one year ago.Also assume that the credit (default) risk premium of an A-rated bond declined by 0.4% 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.

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.

The yield curve for corporate bonds.

Other things being equal, an expected decrease in interest rates will increase the demand for long-term funds by borrowers.

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