Exam 7: The Risk and Term Structure of Interest Rates

An investor sees the current twelve-month rate at 4% and expects the following future twelve-month rate for each of the subsequent years; 4.5%, 5.5% and 6.0%. If this investor views a four-year maturity at 5.65% as equal to four consecutive one-year securities, what is his/her risk premium?

All of the following are true about the risk spread except:

If a local government eliminates the tax exemption on municipal bonds, we'd expect to see:

Interest on most bonds issued by states is usually exempt from:

If a bond's rating improves it should cause:

What is the highest bond rating assigned by Standard and Poor's?

Suppose the tax rate is 25% and the taxable bond yield is 8%. What is the tax-exempt bond yield?

The risk structure of interest rates says:

What is the effective after-tax yield to an investor from a bond paying $70 per $1,000 annually, if the investor is in a 25% marginal tax bracket? Explain.

Under the Expectations Hypothesis of the term structure of interest rates, explain the impact of a U.S. Treasury decision to phase out the 30-year bond and to only focus on 3-month, 1-year, 5-year and 10-year bonds?

Suppose that interest rates are expected to remain unchanged over the next few years. However, there is a risk premium for longer-term bonds. According to the liquidity premium theory, the yield curve should be:

A borrower who has to pay an interest rate of 8% rather than 6% due to risk spread will:

Increasing tensions in many parts of the world should:

An investor in a 30% marginal tax bracket, earning $10 in interest annually for a $100 U.S. Treasury bond:

According to the Expectations Hypothesis:

As technology allows information regarding the financial health of corporations to become easier to obtain, we should expect:

Under the Expectations Hypothesis, a downward-sloping yield curve suggests:

A yield curve that slopes upward says each of the following, except:

Consider the yield curve below. Using the Expectations Hypothesis, what conclusion can we draw from the data? Now, using the Liquidity Premium Theory, cite two possible conclusions we can draw from the data.

Most commercial paper is: