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7 - total or overall risk default risk inflation risk...

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Unformatted text preview: total or overall risk default risk inflation risk interest rate risk Multiple Choice Section: Ratings and the Risk Structure oflnterest Rates {- rise, remain unchanged oa r fall, remain unchanged r rise;fall r- tall; rise MultipleClIoice Section. Ratings andthe Risk Structure oflnterest Rates award: 3 0 out of ............... Letthe tax rate be denoted byt, the interest rate on ataxable bond by i, andthe interest rate on atax—exempt bond by it! The relationship between i and it.a is: r i=(‘l —i].iite °_’ r itE=ix(1—t] (- itE=ii(1—t] (- i=iteit MultipleChoice Section: Difierences in Tax Status and Municipal Bonds award. 4 0 out of nts Stippose the interest-rate on airs-same oohd and that-the'tax rate Assuming-the ponds'are'otherWIse'identicai, the-interest rate-o'n'tax-exemitt-ponds Wiil he The interest rate on the tax-exempt bond Wili oe when the tax rate rises to 30% r 1 896.27% °_:‘ nines-x, p 9%.2799 p 11.3%;12396 MuitipieChoiee Section Difierehces inTax Status and Municipal Bonds a w a rd: 5_ l] out of The yield curve shows: ,9“ the interest rate on bonds plotted against their risk premium relative to Treasuiy bonds. :- the default risk on bonds as measured pythe bond rating agencies plotted against theiryears to maturity. 9% r the interest rate on bonds plotted against years to maturity, holding riskt’ixed. :- the risk spread between corporate and Treasury bonds plotted againstyears to maturity. MultipleChoice Section: The Term Structure oflnterest Rates award: 0 out of “1P0 '5... .................................. .. .... .. uopose hat e in eres rate on a one year bond is 5 . a e expected in eres ra e on onesyear on sloreac 0 bonds is and the yield curve connectihgthesetwo pond maturities has 5‘ 15% positive efolioWihg siope (positiyefnegatiyefhorizontai) oyears is eris premium on ree yearbohdsis e interest ra e on ree year b 5% horizontal 04. :- Eile‘ positive 5‘ 15%. positive MuitipieClIoice Section. The Term Structure ofinterest Rates award. 7 I) out of 1D The expectations hypothesis otthe term structure olinterest rates argues that in bond market equiiibrium,the foliowmg equality holds ii +121)“ “ZIP(1 +i11)(1+i?g+1) Which olthe foiioWihg statements does notexpiaih why this equation hoids in equiiiorium? p Wheneverthe ieftside ofthe equation is greaterthanthe right side‘ agents have an incentive to seii the oneeyear oond This action iowers its price and raises its yieid, restoringthe equaiity r Wheneverthe ieltside ofthe equation is iessthan the rightside, agents have an incentive to seiltheirlwosyear bonds and buyone year ponds These actions raise yields on twosyear ponds and lowerthem on onesyear bonds. restoring the equality ea :- Wheheverthe ieltside ofthe equation is iessthan the rightside, agents have an incentive to ouylwo-year ponds and sell theirone year oonds These actions raise yields on two-year ponds and lowerthem on one-year bonds, restoring the equality p Wheneverthe ieftside ofthe equation is greaterthanthe right side‘ agents have an incentive to buy the twoeyeartmnd This action drives up its price and lowers its yield‘ restoring the equaiity MuitipleClIoioe Section The Term Structure oflhterest Rates award' 8 0 out of 10p nts Assume initiallythatthetwo-year interest rate is 3 0% and thatthe risk premium on two-year ponds is 1 0% The Federal Reserve then announces that starting immediately, its targetforthe one-year interest rate is 3 one, and that it intends to hold one-year rates at this level‘for an extended period 'Whatis the new equilibrium interest rate on the two-year pond? oar 40% r“ 50% F 30% P‘ 50% Multipleclioioe Section The Term Structure ollnterest Rates 3 w a rd 9- 0 out of Which ofthe following statements is true? r Awidening ofthe risk spread indicates a future economic expansion since interest rates tend to rise as the business cycle improves °_. r Statistically, interest rates are useful predictors offuture economic actiyity because they are available daily‘ whereas GDP is only available quarterly and With a lag. r Since the riskiness ofboth corporate and government bonds rises as a recession approaches, the impact on the risk spread cannot be predicted in advance. re An inverted yield curve indicates a forthcoming economic expansion Multiple Choice Section: The Information Content oflnterest Rates Considerthe interest rate data in the following table. Table Eamonth Treasury Bill tueyear Treasury Bond Elaa January 1.50% 6.00% 6.25% April 1,75% 5,00% 5 50% Between Januaryand Afifll‘ the yield curve has flattened and the risk spread has Widened The information contentin the yield spread implies thatthe economy may soon experience afn) recession.The information in the risk structure implies that the economy may soon experience a[n)recession ...
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