Workshop 3 Flashcards

1
Q

Can debt and equity be long term financial instruments

A

yes

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2
Q

The term structure of interest rates is

A

the relationship among interest rates on bonds with different maturities

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3
Q

What happens to the yield curve if the long term interest rates are above short term interest rates

A

Upward sloping

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4
Q

What happens to the yield curve if the short term interest rates are above the long term interest rates

A

Downward sloping

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5
Q

According to the expectations theory of the term structure what happens to interest rates on bonds of different maturities

A

Interest rates on bonds of different maturities move together over time.

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6
Q

According to the expectations theory of the term structure

A

Yield curves should be equally likely to slope downward as slope upward.

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7
Q

According to the segmented markets theory of the term structure what happens to interest rates on bonds of different maturities

A

Interest rates on bonds of different maturities do not move together over time.

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8
Q

what will happen according to the liquidity premium theory of the term structure

A

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.

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9
Q

According to the liquidity premium theory, a yield curve that is flat means that

A

Short-term interest rates are expected to fall moderately in the future.

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10
Q

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

A

True

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11
Q

The expected return on corporate bonds decreases as default risk increases.

A

True

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12
Q

A corporate bond’s return becomes less uncertain as default risk increases.

A

False

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13
Q

If a corporation’s earnings rise, then the default risk on its bonds will

A

decrease, and the equilibrium interest rate on these bonds will decrease.

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