Tutorial answers 9s - 2206 AFE Tutorial answers 9 Week 12...

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2206 AFE Tutorial answers 9 Week 12 Answers Chapter 18 Question 5, p. 746 5(a). The term structure of interest rates refers to the relationship between yields and maturities for fixed income securities of the same or similar issuer. Expectations regarding future interest rate levels give rise to differing supply and demand pressures in the various maturity sectors of the bond market. These pressures are reflected in differences in the yield movements of bonds of different maturity. The “term structure of interest rates,” or “yield curve,” will normally be upward sloping in a period of relatively stable expectations. The theoretical basis for the upward sloping curve is the fact that investors generally demand a premium, the longer the maturity of the issue, to cover the risk through time, and also to compensate for the greater price volatility of longer maturity bonds. 5(b). According to the expectations theory of yield curve determination, if borrowers prefer to sell short maturity issues at the time lenders prefer to invest in longs, which happens when interest rates are expected to fall, longer maturity issues will tend to yield less than shorter maturity issues. The yield curve will be downward sloping. This generally occurs in periods when restrictive monetary policy by the Federal Reserve System, in an attempt to control inflation and inflation expectations causes very high short-term interest rates. In these circumstances, demand for short-term maturities is severely dampened. 5(c). The “real” rate of interest is simply the difference between nominal interest rates and some measure of inflation, such as the current consumer price index or GNP deflator. In other words, it is an inflation-adjusted interest rate. 5(d). The market for U.S. Treasury securities is very large and highly liquid as a result of the huge cumulative debt of the United States Government over time. Features of Treasury securities tend to be fairly standardized and, by definition, all from one issuer. AAA corporate bonds, on the other hand, are issued by hundreds of different corporations and there are unique features to every different issue even from the same corporation. Thus, the market for
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This note was uploaded on 06/09/2009 for the course ACCOUNTING 2206AFE taught by Professor Alexandrakimov during the Three '08 term at Griffith.

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Tutorial answers 9s - 2206 AFE Tutorial answers 9 Week 12...

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