Ch 7 sb Flashcards
When there is an increase in some interest rates and a decrease in others, it is called ______.
interest rate spread
Bond rating services are used to
likelihood that the bondholder will be repaid
Which of the following contributed to the subprime mortgage crisis?
Poor income documentation
Relaxed lending standards
Low down payments
A loan made to someone with a low credit score, high LTV, and insufficient documentation is called _____.
a subprime loan
Interest rate spreads are described as
increase and decrease in some interest rates
Which of the following is true about the subprime mortgage crisis?
lenders assumed that the housing prices would rise
Speculative-grade commercial paper
was originally issued as prime-grade.
When we say that U.S. Treasuries act as benchmark bonds we mean that yields on other bonds are measured in terms of the _____________ over Treasuries.
spread
Data on the risk structure of interest rates in the US indicates that the majority of fluctuations in yields over time come from fluctuations in ______.
treasury yields
Consider two bonds that are completely identical, except interest income on Bond A is federally taxed while interest income on Bond B is not. If Bond A pays an 8% yield and the investor has a 30% tax rate, what will the yield be on Bond B, rounded to one decimal place?
` A tax-exempt bond pays a yield of the taxable bond yield times (1 – tax rate). Therefore, Bond B will pay 8% × (1 – 0.3) = 5.6%.
Using U.S. Treasuries data, a graph of the risk structure of interest rates ______ the prediction that lower-rated bonds pay higher yields and ______ the prediction that various interest rates move together.
supports, supports
The term structure of interest rates describes the relationship between the yield on a security and its ______.
time to maturity
Investors tend to base decisions on
after tax yield
The expectations hypothesis of the term structure of interest rates assumes perfect certainty about present and future yields. This certainty implies that
short-term and long-term bonds will be perfect substitutes for each other.
The term structure of interest rates refers to the relationship among bonds with the same risk, but different
maturity dates
The yield curve graphically depicts the _______ structure of interest rates and has ______ on its horizontal axis.
term, time to maturity
According to the expectations hypothesis of the term structure of interest rates, an upward-sloping yield curve indicates that investors expect
short term yields to rise
According to the expectations hypothesis of the term structure of interest rates
the average of current and future short-term yields will equal the current long-term yield over the same period.
When interest rates are expected to rise,
the yield curve will slope up.
long-term interest rates are higher than short-term interest rates.
According to the liquidity premium theory of the term structure of interest rates, today’s long-term yield should equal
the average of short-term yields over the same period plus a risk premium.
As economic conditions deteriorate, the lower the initial grade of the bond,
the more the default-risk premium rises.
the spread between U.S Treasury bonds and Junk bonds widens.
a term spread
the difference between 10-year and 3-month yields.
