Deck 6: The Structure of Interest Rates

Question 1

Default risk premiums are usually smaller during periods of high economic growth.

Answer 1

True

Question 2

Expected lower rates of inflation in the future will lead to an upward sloping yield curve.

Answer 2

False

Question 3

A downward sloping yield curve forecasts higher future interest rates.

Answer 3

False

Question 4

Investment-grade bonds are more likely to default than speculative-grade bonds.

Question 5

A put option sets a "floor" or minimum price of a bond at the exercise price, which is generally at or above par value.

Question 6

Callable bonds have higher market yields than otherwise similar noncallable bonds.

Question 7

An inverted yield curve forecasts higher short-term rates in the future.

Question 8

Bonds rated BBB would have lower yields than AAA-rated bonds, and higher prices, everything else the same.

Question 9

The call price of a bond is usually below the bond's par value.

Question 10

An investor in the 33 percent tax bracket should buy a 6 percent municipal bond rather than a similarly rated 8.5 percent corporate bond.

Question 11

The less marketable a security, the higher its yield.

Question 12

A downward sloping yield curve is typically seen just before an economic expansion.

Question 13

Everything else the same, the higher the marginal tax rate of an investor, the more likely the investor is to invest in municipal bonds as opposed to similarly rated corporate bonds.

Question 14

The market segmentation theory allows for the possibility of a discontinuous yield curve.

Question 15

Treasury and corporate security yields are often combined on the same yield curve.

Question 16

Putable bonds offer higher yields than similar non-putable bonds

Question 17

If interest rates are expected to increase in the future, one would expect to see an upward sloping yield curve.

Question 18

Liquidity premiums cause an observed yield curve to be less upward sloping than that predicted by the expectations theory.

Question 19

The major reason that municipal bonds have lower yields than corporate bonds is that, as a class, municipal debt has less marketability than corporate debt.

Question 20

A convertible bond will generally have a higher market yield relative to similar nonconvertible bonds.

Question 21

Ceteris paribus, the required interest rate of a callable bond will be higher than the interest rate on a convertible bond.

Question 22

List the five basic factors which explain the differences in interest rates on different securities at any point in time.

Question 23

The yield curves show the relationship between interest rates on bonds similar in terms except for maturity.

Question 24

The preferred habitat theory explains the existence of forecasts in the yields curve.

Question 25

Explain how the term structure of interest rates can be used to help forecast future interest rates.

Question 26

Explain (a.) liquidity differences in different types of bonds, (b.) default risk, and (c.) maturity risk premiums.

Question 27

The market segmentation theory assumes that investors are risk-neutral.

Question 28

What shapes of the yield curve can be explained by each of the theories of the term structure of interest rates?

Question 29

Explain the four theories of the term structure.

Question 30

Define the term default risk premium. Why does the "premium" represent the "expected default loss rate"? Explain how and why default risk premiums vary over the business cycle.

Question 31

How do bond options such as a call, put, and convertibility influence the yields on securities relativeto bonds without such options?

Question 32

The pure expectations theory maintains that long term rates are averages of expected futureshort term rates.

Question 33

According to the preferred habitat theory, investors may change their preferred maturity in response to expected yield premiums.