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Ecn 506

In: Business and Management

Submitted By noshoxo
Words 582
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(iv) A plot of the interest rates on default-free government bonds with different terms to maturity is called
A) a risk-structure curve.
B) a default-free curve.
C) an interest-rate curve.
D) a yield curve.

(v) When yield curves are steeply upward sloping,
A) short-term interest rates are above long-term interest rates.
B) short-term interest rates are about the same as long-term interest rates.
C) medium-term interest rates are above both short-term and long-term interest rates.
D) long-term interest rates are above short-term interest rates.

(vi) If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five-year bond is
A) 4 percent.
B) 5 percent.
C) 6 percent.
D) 7 percent.

(vii) According to the liquidity premium theory of the term structure
A) because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time.
B) because of the positive term premium, the yield curve will not be observed to be downward sloping.
C) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium.
D) the interest rate for each maturity bond is determined by supply and demand for that maturity bond.

Chapter 5
Q10. Suppose investors expect 1-year interest rate to be declining from the current 10% to 9% to 8% to 7% to 6%. In addition, the habitat premium for 1-year to 5-year bonds are 0%, 0.2%, 0.4%, 0.6% and 0.8%. What are the current interest rates for 2-year, 3-year, 4-year and 5-year bonds?

Q11. What is risk premium? How is it measured? When there is an increase in the default risk on corporate bonds (due...

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