Annualized yields of short-term and long-term

Reference no: EM13790846

Question 1: Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to

be unaffected.
become upward sloping.
become inverted.
become flat.

Question 2: The yield offered on a debt security is ____ related to the prevailing risk-free rate and ____ related to the security's risk premium.

negatively; positively
negatively; negatively
positively; negatively
positively; positively

Question 3: Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate according to the pure expectations theory?

11.41 percent
12.62 percent
3.00 percent
15.08 percent
12.00 percent

Question 4: Assume that a yield curve is influenced by interest rate expectations and a liquidity premium. Assume the yield curve is initially flat. If liquidity suddenly was no longer important, the yield curve would now have a ____ (assuming no other changes).

slight downward slope
steep downward slope
slight upward slope
steep upward slope

Question 5: Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, then the one-year forward rate is

3.0 percent.
7.0 percent.
8.0 percent.
7.6 percent.

Question 6: If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting ____ in interest rates.

a large increase
a slight increase
a slight decrease
no changes

Question 7: Assume that the Treasury bond yield today is 2% higher than it was one year ago. Also assume that the credit (default) risk premium of an A-rated bond declined by 0.4% since one year ago. A newly issued A-rated bond will likely offer a yield today that is ____ the yield that was offered on an A-rated bond issued one year ago.

greater than
equal to
less than
A or B are both common

Question 8: Securities that offer ____ liquidity will offer a ____ yield to be preferred.

lower; higher
B and C
lower; lower
higher; higher

Question 9: If all other characteristics are similar, ____ would have to offer ____.

taxable securities; a higher after-tax yield than tax-exempt securities
tax-exempt securities; a higher before-tax yield than taxable securities
tax-exempt securities; a higher after-tax yield than taxable securities
taxable securities; a higher before-tax yield than tax-exempt securities

Question 10: An investor's tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax yield of 11 percent?

7.7 percent
none of the above
15.71 percent
130 percent
11.00 percent

Reference no: EM13790846

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