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Financial management > Interest Rates Chapter 6 > Flashcards

Interest Rates Chapter 6 Flashcards

1
Q

r

A

any nominal rate

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2
Q

r^rf

A

represents the rate of interest on treasury securities(risk free rate)

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3
Q

r*

A

real risk free rate of interest

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4
Q

ip

A

inflation premium

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5
Q

DRP

A

default risk premium

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6
Q

LP

A

liquidity Premium

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7
Q

MRP

A

maturity risk premium

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8
Q

what the determinats of interest rate equation

A

R = r* + ip + drp + lp + mrp

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9
Q

when you have higher risk?

A

you could have a higher return. you will also have higher return, higher interest and higher premiums

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10
Q

when you liquidity premium is high

A

the lp goes down(decreases

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11
Q

when your liquidity premium is low

A

the lp goes up(increases)

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12
Q

inflation premium

A

a premium added to the real risk-free
rate of interest to compensate for expected inflation, which is equal
to the average rate of inflation expected over the life of the security.

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13
Q

default risk premium

A

a premium based on the
probability that the issuer will default on the loan, and it is measured
by the difference between the interest rate on a U.S. Treasury bond
and a corporate bond of equal maturity, liquidity, and other features.

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14
Q

liquidity premium

A

is added to the rate of interest on
securities that are not liquid. A liquid asset is one that can be sold at
a predictable price on short notice. (large firm vs. small firm)

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15
Q

maturity risk premium

A

is a premium that reflects
interest rate risk; longer-term securities have more interest rate risk
(the risk of capital loss due to rising interest rates) than do shorterterm securities, and the MRP is added to reflect this risk.

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16
Q

what types of debt deal with short term tresury

A

inflation premium

17
Q

what types of debt deal with long term treasury

A

inflation premium and maturity risk premium

18
Q

what types for debt deal with short term corporate

A

inflation premium; default risk premium, liquidity premium

19
Q

what types of debt deal with long term corporate

A

inflation premium, maturity risk premium, default risk premium, liquidity premium

20
Q

do long term securities carry high yields?

A

yes

21
Q

the relationship between the interest rate(yield) and maturities is?

A

an upward slope. this is because it increases with inflation

22
Q

are corporate yields higher or lower than treasury securities

A

higher

23
Q

are treasury yields more narrow or widen as corporate bond decreases?

A

widens

Financial management (4 decks)

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