Chapter 6

Question 1

What is rick structure of interest rates?

Answer 1

Relationship among interest rates

Question 2

What is the term structure of interest rates?

Answer 2

Relationship among interest rates on bonds with different terms to maturity

Question 3

What are two features of interest rate behavior for bonds with the same maturity?

Answer 3

Interest rates on different categories of bonds differ from one another in a given year

Spread between interest rates varies over time

Question 4

Who has no default risk?

Answer 4

Us treasury

default free bonds

Question 5

What is an attribute that influences a bonds interest rate is ?

Answer 5

Default risk

Question 6

What is risk premium?

Answer 6

Spread between interest rate of bonds with default risk and default free bonds

How much additional interest is needed for people to hold that risky bond

Question 7

What does a bond with default risk have?

Answer 7

Positive risk premium, higher default risk=higher risk premium

Question 8

What do credit-rating agencies do?

Answer 8

Provide information on if a company will default on their loan

Question 9

What is an investment-grade security?

Answer 9

Low risk of default Baa or above

Question 10

What is a junk bond?

Answer 10

High default risk, lower than Baa

high yield bonds

Question 11

Another attribute to interest rate?

Answer 11

Liquidity

U.S. treasury bonds compared to corporate conds

Question 12

What are municipal bonds lower interest rates than treasury bonds?

Answer 12

Exemption from federal taxes

Question 13

What three things determine risk structure of interest rates?

Answer 13

Default risk, liquidity, income tax treatment

Question 14

What happens as the bond’s default risk increases?

Answer 14

Risk premium rises

Question 15

What happens with higher liquidity?

Answer 15

Lower interest rates

Question 16

What is a yield curve?

Answer 16

A plot of yields on bonds with differing terms to maturity but the same all other factors

Question 17

What must a theory of term structures include?

Answer 17

Explaining why curves take on different shapes
why interest rates of bonds with different maturities move together
When short-term interest rates are low yield curve is likely to upward slope
Yield curves almost always slope up

Question 18

Liquidity premium

Answer 18

Explains all three

Question 19

What is the expectations theory?

Answer 19

Interest rate on a long term bond will equal an average of the short-term interest rates that people expect over the lifetime of a bond

do no prefer bonds of one interest rate over another

Question 20

What is perfect substitutes?

Answer 20

The bonds of different maturities must have equal returns

Question 21

What happens if the curve is upward sloping?`

Answer 21

Short term interest rates will rise

Question 22

What happens if curve is downward sloping?

Answer 22

Short term interest rates are expected to fall

Question 23

When the curve is flat?

Answer 23

Short term interest rates are not expected to change

Question 24

What is unique about segmented market theory?

Answer 24

Sees markets for different maturity bonds as separate and segmented

Bonds with other maturities do not affect each bonds interest rate

Assume there is no substitute

Curve slopes up because demand for long term bonds is lower than short term, therefore lower prices and higher interest rates

Question 25

What is the liquidity premium theory?

Answer 25

Interests rates on a long term bond will equal an average of short term interest rates plus liquidity premiums

Bonds are related but people can prefer one over the other

Question 26

What do investors prefer?

Answer 26

Short term bonds