To learn more about the book this website supports, please visit its Information Center.: 2015 McGraw Hill Education (India) Private Limited Any use is subject to the Answers and Solutions: 6 -1 Chapter 6 Risk, Return, and the Capital Asset Pricing Model ANSWERS TO END-OF-CHAPTER QUESTIONS Homework Assignment- Chapter 6 - 00262959 Tutorials for Question of Finance and Finance. the company incurs a refinancing risk. True False. Multiple Choice Questions: (0.1 each/ 1.2 total) 5. Financial leverage: The interest rate on the debt would be 7%. EC 230, Money and Banking Spring 1998 Lecture Notes Introduction Hubbard, Chapters 1, 2, and 3. Lecture 1: 1-12-98 - What is Money and Where Did it Come From? Lecture 2: 1-14-98 - More About Money Lecture 3: 1-16-98 - Introduction to Financial Markets Interest Rates Interest Rates and Rates of Return
Chapter 6 (term structure of interest rates) 1) When the yield curve is downward-sloping, A) short-term yields are higher than long-term yields. B) long-term yields are higher than short-term yields. C) the bond market is anticipating the U.S. Treasury may default on its obligations. D) the inflation rate is expected to rise. The Term Structure of Interest Rates What is it? The relationship among interest rates over different time-horizons, as viewed from today, t = 0. A concept closely related to this: The Yield Curve • Plots the effective annual yield against the number of periods an investment is held (from time t=0).
Unformatted text preview: The Economics of Money, Banking, and Financial Markets, 9e (Mishkin) Chapter 6 The Risk and Term Structure of Interest Rates 6.! Risk Structure of Interest Rates 1) The risk structure ofinterest rates is A) the structure of how interest rates move over time. C) the relationship among the term to maturity of different bonds. The interest rate on a LT bond will equal an average of the current ST interest rate and the expected future ST rate. Assumption: buyers of bonds do not prefer bonds of one maturity over another; they consider bonds with different maturities to be perfect substitutes. i(n t)= [i(t) + iE(t+1) ++ iE(t+n-1)]/n. Chapter 6 -- Interest Rates Interest rates The determinants of interest rates Term structure of interest rates and yield curves What determines the shape of yield curves Other factors Interest rates Cost of borrowing money Factors that affect cost of money: Production opportunities Time preference for consumption Chapter 6 (term structure of interest rates) 1) When the yield curve is downward-sloping, A) short-term yields are higher than long-term yields. B) long-term yields are higher than short-term yields. C) the bond market is anticipating the U.S. Treasury may default on its obligations. D) the inflation rate is expected to rise. The Term Structure of Interest Rates What is it? The relationship among interest rates over different time-horizons, as viewed from today, t = 0. A concept closely related to this: The Yield Curve • Plots the effective annual yield against the number of periods an investment is held (from time t=0). Assume that the risk-free interest rate is 6% and that a firm can issue bonds at an interest rate of 9%. Assume further that the difference between the average yield on stocks and the average yield on corporate bonds is 4%. What is the risk premium associated with the firm's cost of equity capital?
papers have called into question the ability of some of the more popular Finance practitioners often use models of the term structure of interest rates to assist in Equation (6) is quite a useful result, particularly considering that we can also state, from the market price of risk process is a fixed multiple to the instantaneous (1) What is the yield to maturity on a 10-year, 9% annual coupon, $1,000 par value bond that sells Which bond has more interest rate risk: an annual payment 1-year bond or a 10-year bond? What is the term structure of interest rates? As the above calculated is the 6-month rate, calculate the nominal rate on bond as,. Chapter 6 The Risk and Term Structure of Interest Rates Multiple Choice 1) The risk structure of interest rates is (a) the structure of how interest rates move over time. (b) the relationship among interest rates of different bonds with the same maturity. (c) the relationship among the term to maturity of different bonds. Expectations theory. The proposition that the interest rate on a long-term bond will equal the average of the short-term interest rates that people expect to occur over the life of the long-term bond. Inverted yield curve. A yield curve that is downward-sloping. The risk structure of interest rates is the relationship among interest rates of different bonds with the same maturity The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is • You expect the interest rate on a one-year bond to be 8% next year. • Then the expected return for buying two one-year bonds averages (6% + 8%)/2 = 7%. • The interest rate on a two-year bond must be 7% for you to be willing to purchase it. The interest rate on a long term bond will equal the average of the short term interest rates that people expect to occur over the life of the long term bond. - If short term interest rates are expected to be 10% on average over five years, the interest rate on bonds with five years to maturity will be 10% too.
I move on the main subject of this survey: Term Structure of Interest Rates. 6. There are some different classifications of yield curves. Generally, there are three different yield rate of inflation and the risk this poses to the future value of cash flows. Section 3 presents the theories of the term structure, such as expectation . The Period 1993 to 2007. 16. 5.2. The Period 1997 to 2007. 22. 6. Conclusion The term structure of interest rates is often presented as a yield curve, which plots swap (OIS) and government bond data (for further details see Section 4 and compensation for interest rate risk must be a multiple of the variance of that risk. TERM STRUCTURE OF INTEREST RATES 547 liquidity preference est rates. These three points do not question the assumption of universal risk aversion-. In finance, the yield curve is a curve showing several yields to maturity or interest rates across 5 Effect on bond prices; 6 See also; 7 Notes; 8 References First, it may be that the market is anticipating a rise in the risk-free rate. Model of the Term Structure of Interest Rates and Its Application to the Pricing of Interest Rate very long-term interest rates, such as thirty-year government bond yields, respond to the Rational Expectations Model of the Term Structure, " Journal of Monetary Economics, whether the response of forward rates has been appropriate or whether Finally, we can ask whether the risk variables of this section improve. Study Chapter 6: bond valuation and interest rates part 4 flashcards from Lisa Dennis's cga Ontario class online, or in what are the 3 theories of the term structure of interest rates in order to be compensated for the interest rate risk inherent in holding less liquid, longer-term debt. 3 Chapter 3 Multiple Choice Questions.