Workshop 3 Flashcards
Can debt and equity be long term financial instruments
yes
The term structure of interest rates is
the relationship among interest rates on bonds with different maturities
What happens to the yield curve if the long term interest rates are above short term interest rates
Upward sloping
What happens to the yield curve if the short term interest rates are above the long term interest rates
Downward sloping
According to the expectations theory of the term structure what happens to interest rates on bonds of different maturities
Interest rates on bonds of different maturities move together over time.
According to the expectations theory of the term structure
Yield curves should be equally likely to slope downward as slope upward.
According to the segmented markets theory of the term structure what happens to interest rates on bonds of different maturities
Interest rates on bonds of different maturities do not move together over time.
what will happen according to the liquidity premium theory of the term structure
The interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium.
According to the liquidity premium theory, a yield curve that is flat means that
Short-term interest rates are expected to fall moderately in the future.
An increase in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. True or false
True
The expected return on corporate bonds decreases as default risk increases.
True
A corporate bond’s return becomes less uncertain as default risk increases.
False
If a corporation’s earnings rise, then the default risk on its bonds will
decrease, and the equilibrium interest rate on these bonds will decrease.
