Exam 6: Understanding Financial Markets and Institutions

This is a comparison of market yields on securities, assuming all characteristics except maturity are the same.

All of the following are benefits that financial institutions provide to our economy except _________.

Why is it useful to calculate forward rates?

These markets trade currencies for immediate or for some future stated delivery.

You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 3.55%. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real interest rate = 2.75% Default risk premium = 1.05% Liquidity risk premium = 0.50% Maturity risk premium = 1.85% What is the fair interest rate on Moore Corporation 30-year bonds?

All of the following are factors that influence interest rates for individual securities except ________.

Assume that you observe the following rates on long-term bonds: U.S. Treasury bonds = 4.15% AAA Corporate bonds = 6.2% BBB Corporate bonds = 7.15% The main reason for the differences in the interest rates is:

The theory that states that the yield curve reflects the market's current expectations of future short-term rates is called the _____________.

In 20XX, the 10-year Treasury rate was 4.5% while the average 10-year Aaa corporate bond debt carried an interest rate of 6.0%. What is the average default risk premium on Aaa corporate bonds?

This is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments.

Suppose we observe the following rates: ₁R₁ = 12%, ₁R₂ = 15%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now, E(₂r₁)?

In the U.S., these financial institutions arrange most primary market transactions for businesses.

Interest rates A particular security's default risk premium is 3 percent. For all securities, the inflation risk premium is 2 percent and the real interest rate is 2.25 percent. The security's liquidity risk premium is 0.75 percent and maturity risk premium is 0.90 percent. The security has no special covenants. What is the security's equilibrium rate of return?

The theory that argues that individual investors and financial institutions have specific maturity preferences is called the ______________.

Unbiased Expectations Theory The Wall Street Journal reports that the rate on 3-year Treasury securities is 6.25 percent and the rate on 5-year Treasury securities is 6.45 percent. According to the unbiased expectations hypotheses, what does the market expect the 2-year Treasury rate to be three years from today, E(₄r₂)?

One-year Treasury bill rates in 20XX averaged 5.15% and inflation for the year was 7.3%. If investors had expected the same inflation rate as that realized, calculate the real interest rate for 20XX according to the Fisher effect.

Forecasting Interest Rates On May 23, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were as follows: _{Using the unbiased expectations theory, what is the one-year forward rate on zero-coupon Treasury bonds for year four as of May 23, 20XX? A.5.925% B.6.45% C.7.05% D. 10.32%}

Dakota Corporation 15-year bonds have an equilibrium rate of return of 9%. For all securities, the inflation risk premium is 1.95% and the real interest rate is 3.65%. The security's liquidity risk premium is 0.35% and maturity risk premium is 0.95%. The security has no special covenants. Calculate the bond's default risk premium.

All of the following are types of financial institutions except _______.

Forecasting Interest Rates A recent edition of The Wall Street Journal reported interest rates of 3.10 percent, 3.50 percent, 3.75 percent, and 3.95 percent for three-year, four-year, five-year, and six-year Treasury security yields, respectively, According to the unbiased expectation theory of the term structure of interest rates, what are the expected one-year rates for year 6?