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Unformatted text preview: TUTORIAL FOR CHAPTER 5: THE RISK AND TERM STRUCTURE OF INTEREST RATES Questions: 5 th edition - 3, 9, 10, 11. 1. Risk premiums on corporate bonds are usually anti-cyclical; that is they decrease during business cycle expansion and increase during business cycle recessions. Why is this so? 2. Predict what will happen to interest rates on a corporations bonds if the federal government guarantees today that it will pay creditors if the corporation goes bankrupt in the future? Draw the diagram to justify your answer. 3. Predict what would happen to the risk premiums on corporate bonds if brokerage commissions were lowered in the corporate bond market. 4. If the income tax exemption on municipal bonds were abolished, what would happen to the interest rates on these bonds? What effect would it have on interest rates on US Treasury securities? Problems: 1. Assuming that the pure expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five years, and plot the resulting yield...
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