Question 1

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 credit riskpremium, 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.
A) 8
B) 7.6
C) 7.5
D) 7.9
E) none of the above

Accepted Answer

The answer of Vaughn Corporation is considering the issue of...

Question 2

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

Accepted Answer

The forward rate may either underestimate or overestimate the market's expectation of the future interest rate, as it reflects not only expectations about future interest rates but also premiums for bearing risk, such as liquidity risk.

Question 3

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 place ____ pressure on the yield of T-bills.
A) decrease; downward
B) decrease; upward
C) increase; upward
D) increase; downward

Accepted Answer

The answer of Assume that the Treasury experiences a large...

Question 4

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 taxablesecurities that pay
A) 31.1 percent.
B) 19 percent.
C) 12.5 percent.
D) 14 percent.

Accepted Answer

The answer of You are considering the purchase of a...

Question 5

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

Accepted Answer

This is because a higher bond rating means that credit agencies view the issuer as having a lower risk of defaulting on its debt obligations.

Question 6

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

Accepted Answer

The statement correctly defines the term structure of interest rates.

Question 7

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

Accepted Answer

While investors may prefer Treasury securities as a safe investment option, there are some investors who may be willing to take on higher levels of risk for potentially higher returns. Therefore, not all investors will prefer only Treasury securities.

Question 8

Assume that debt maturity markets are segmented, such that short-term debt markets are funded by surplus units that are different from the surplus units that fund the long-term debt markets.Ifthe Treasury uses a relatively large proportion of ____ debt to finance the deficit, this may place upward pressure on ____ interest rates.
A) long-term; long-term
B) long-term; short-term
C) short-term; long-term
D) B and C

Accepted Answer

If the Treasury uses a large proportion of long-term debt to finance the deficit, it increases demand in the long-term debt market, potentially raising long-term interest rates due to segmented markets.

Question 9

The preference for more liquid short-term securities places downward pressure on the slope of the

Accepted Answer

The preference for more liquid short-term securities typically places upward pressure on the slope of the yield curve, as it increases demand for short-term securities, lowering their yields relative to long-term securities.

Question 10

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

Accepted Answer

This is true as some types of debt securities, such as high yield or junk bonds, offer a higher yield than more traditional bonds with higher credit ratings. The higher yield compensates for the higher risk of default.

Question 11

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ____ pressure on the demand for long-term fundsissued by borrowers and the yield curve will be ____ sloping.
A) upward; downward
B) downward; upward
C) upward; upward
D) downward; downward

Accepted Answer

The answer of According to segmented markets theory, if investors...

Question 12

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 aheadis ____ percent.
A) 1.8
B) 9
C) 15
D) none of the above

Accepted Answer

The formula for the forward rate is:

Forward rate = [(1 + interest rate on n-year security) ^ n] / [(1 + interest rate on m-year security) ^ m] - 1

Where n > m

Using the formula, we can calculate the forward rate two years ahead:

Forward rate = [(1 + 0.13) ^ 3] / [(1 + 0.09) ^ 1] - 1

Forward rate = (1.5301 / 1.09) - 1

Forward rate = 0.4018 or 40.18%

Therefore, the answer is C) 15 (rounded to the nearest whole number).

Question 13

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

Accepted Answer

The forward rate is indeed commonly used to represent the market's forecast of the future interest rate. It is the expected future interest rate that is implied by the current market rates.

Question 14

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

Accepted Answer

The answer of Other things being equal, an expected decrease...

Question 15

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 aheadis____ percent.
A) 2.8
B) 115
C) 103
D) 15.1

Accepted Answer

The formula for calculating the one-year forward rate one year ahead is:

(1 + r3) = (1 + r2)(1 + m1,2)

where r3 = annualized yield on a three-year security
r2 = annualized two-year interest rate
m1,2 = one-year forward rate one year ahead

Substituting the given values, we get:

(1 + 0.13) = (1 + 0.12)(1 + m1,2)

Solving for m1,2, we get:

m1,2 = 0.151 or 15.1%

Therefore, the forward rate one-year ahead is 15.1%. The correct answer is D.

Question 16

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

Accepted Answer

The answer of The graphic comparison of maturities and annualized...

Question 17

According to the segmented markets theory, the term structure of interest rates is determined solely by expectations of future interest rates.

Accepted Answer

The segmented markets theory argues that the term structure of interest rates is determined primarily by supply and demand factors within individual segments of the market (such as short-term or long-term bonds), rather than solely by expectations of future interest rates. These factors can include differences in the risk or liquidity characteristics of different securities, as well as institutional factors such as regulatory requirements for certain types of investments. While expectations of future interest rates may play a role in shaping the term structure of interest rates within each segment, they are not the sole determinant of the overall structure.

Question 18

The yield curve for corporate bonds
A) would typically lie below the Treasury yield curve.
B) identical to the Treasury yield curve.
C) typically has the same slope as the Treasury yield curve.
D) is irrelevant to investors.

Accepted Answer

Corporate bonds typically have a higher yield than Treasury bonds due to higher risk, but the slope of the yield curve can be similar, reflecting similar economic expectations.

Question 19

An upward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.
A) longer; lower
B) longer; higher
C) shorter; lower
D) shorter; higher
E) B and C

Accepted Answer

The answer of An upward-sloping yield curve indicates that Treasury...

Question 20

Treasury securities are exempt from federal and state income taxes.

Accepted Answer

Treasury securities are exempt from state and local income taxes, but they are subject to federal income taxes.

Quiz 3: Structure of Interest Rates

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

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 place pressure on the yield of T-bills.

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 taxablesecurities that pay

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

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

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

The preference for more liquid short-term securities places downward pressure on the slope of the

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

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place pressure on the demand for long-term fundsissued by borrowers and the yield curve will be sloping.

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 aheadis ____ percent.

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

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

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 aheadis____ percent.

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

According to the segmented markets theory, the term structure of interest rates is determined solely by expectations of future interest rates.

The yield curve for corporate bonds

An upward-sloping yield curve indicates that Treasury securities with maturities offer annualized yields.

Treasury securities are exempt from federal and state income taxes.