Homework Answers
1.
Normal yield curve is upward sloping because of maturity risk
premium i.e., investors demand compensation for investing in long
term securities which have higher risk
2.
It says future short term rates would be lesser than current short
term rates
3.
Duration measures the price sensitivity of bonds with respected to
interest rates.
Increase in time to maturity increases the duration
Increase in Yield to maturity lowers the duration
Increase in Coupon rate lowers the duration
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21. Is a "normal yield curve" upward sloping or downward sloping, and why? 22. According to...
Why does the theory assume an upward sloping yield curve? If the yield curve is upward...
Why does the theory assume an upward sloping yield curve? If the yield curve is upward sloping and we expect it to steepen following an increase in long term rates and decrease in short term rates, would it be more beneficial to hold a bullet (focused) or a barbell bond portfolio? Explain
The first blank options are (a downward-sloping, a humped, and an upward-sloping) 5. Drawing a yield...
The
first blank options are (a downward-sloping, a humped, and an
upward-sloping)
5. Drawing a yield curve Given the indicated maturities listed in the following table, assume the following yields for U.S. Treasury securities: Maturity (Years) Yield (%) 1 2.0 5 3.1 10 3.8 20 4.6 30 5.5 On the following graph, plot the yield curve implied by these interest rates. Place a blue point (circle symbol) at each maturity and interest rate in the table, and the yield curve...
8. The expectations theory suggests that: the yield curve should usually be downwardr sloping the slope...
8. The expectations theory suggests that: the yield curve should usually be downwardr sloping the slope of the yield curve depends on the expected future path of short-term rates. the slope of the yield curve reflects the risk premium incorporated into the yields on long-term bonds. the yield curve should usually be upward-sloping. A. B. D.
10. Ierust Plus and decisions Suppose that a firm is facing an upward-sloping yield curve and...
10. Ierust Plus and decisions Suppose that a firm is facing an upward-sloping yield curve and needs to borrow money to invest in production. Does this mean that the firm should consider borrowing only at short-term rates? No, the firm needs to take the volatility of short-term rates into account. Yes, using short-term financing will give the firm the lowest possible interest rate over the life of the project. No, an upward-sloping yield curve means that the firm will get...
Indicate whether the statement is true, false, or uncertain, and explain why. Your answers should be...
Indicate whether the statement is true, false, or uncertain, and explain why. Your answers should be short and concise. The call feature reduces the expected life of the bond. The value of a Treasury bond should be equal to the sum of the values of the STRIPs created from it. According to the Expectations Hypothesis, an upward sloping yield curve is based on the expectation that short-term interest rates will increase. An upward sloping yield curve necessarily implies expectations of...
If the yield curve is downward sloping, what is the yield to maturity on a 10-year...
If the yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury coupon bond, relative to that on a 1-year T-bond? and why? . The yield on the 10-year bond is less than the yield on a 1-year bond The yield on a 10-year bond will always be higher than the yield on a 1-year bond because of maturity premiums. It is impossible to tell without knowing the coupon rates of the bonds. The yields...
Suppose that we observe the following spot rates, i.e. the yield curve is upward sloping. The...
Suppose that we observe the following spot rates, i.e. the yield curve is upward sloping. The spot rates are annual rates that are semi-annually compounded. Time to Maturity Spot Rate 0.5 2.00% 1.0 2.50% 1.5 3.00% 2.0 3.50% 1. Compute the six-month forward curve, i.e. compute f(0,0.5,1.0), f(0,1.0,1.5), f(0,1.5,2.0). 2. What can we say about the forward curve? When the term structure of interest rates is upward sloping, the forward curve is __________ (upward/downward) sloping.
If the Treasury yield curve is downward sloping, how should the yield to maturity on a...
If the Treasury yield curve is downward sloping, how should the yield to maturity on a 13-year Treasury coupon bond compare to that on a 1-year T-bill? a. The vield on a 13-year bond would be less than that on a 1-year bill. b. The yield on a 13-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium. c. It is impossible to tell without knowing the coupon rates of the...
Suppose the yield curve of an economy becomes B from A (the yield curve became flattened),...
Suppose the yield curve of an economy becomes B from A (the
yield curve became flattened), which of the following statements
are CORRECT? (*Note: This question was set to be multiple answer
instead of multiple choice by mistake. You are supposed to choose
only one of the following options.)
i. Duration of a coupon bonds have been increased.
ii. % Change in duration for high coupon bonds are higher for
high coupon bonds than small coupon bonds (both have the...
The current yield curve for default-free zero-coupon bonds is as follows: Maturity (Years) 10 YTM (%)...
The current yield curve for default-free zero-coupon bonds is as follows: Maturity (Years) 10 YTM (%) 10.5% 11.5 12.5 points a. What are the implied 1-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal places.) eBook Forward Rate Maturity 2 years 3 years Print References b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will be the yield to maturity on 1-year zero-coupon bonds next...
The
first blank options are (a downward-sloping, a humped, and an
upward-sloping)
5. Drawing a yield curve Given the indicated maturities listed in the following table, assume the following yields for U.S. Treasury securities: Maturity (Years) Yield (%) 1 2.0 5 3.1 10 3.8 20 4.6 30 5.5 On the following graph, plot the yield curve implied by these interest rates. Place a blue point (circle symbol) at each maturity and interest rate in the table, and the yield curve...
8. The expectations theory suggests that: the yield curve should usually be downwardr sloping the slope of the yield curve depends on the expected future path of short-term rates. the slope of the yield curve reflects the risk premium incorporated into the yields on long-term bonds. the yield curve should usually be upward-sloping. A. B. D.
10. Ierust Plus and decisions Suppose that a firm is facing an upward-sloping yield curve and needs to borrow money to invest in production. Does this mean that the firm should consider borrowing only at short-term rates? No, the firm needs to take the volatility of short-term rates into account. Yes, using short-term financing will give the firm the lowest possible interest rate over the life of the project. No, an upward-sloping yield curve means that the firm will get...
If the Treasury yield curve is downward sloping, how should the yield to maturity on a 13-year Treasury coupon bond compare to that on a 1-year T-bill? a. The vield on a 13-year bond would be less than that on a 1-year bill. b. The yield on a 13-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium. c. It is impossible to tell without knowing the coupon rates of the...
Suppose the yield curve of an economy becomes B from A (the
yield curve became flattened), which of the following statements
are CORRECT? (*Note: This question was set to be multiple answer
instead of multiple choice by mistake. You are supposed to choose
only one of the following options.)
i. Duration of a coupon bonds have been increased.
ii. % Change in duration for high coupon bonds are higher for
high coupon bonds than small coupon bonds (both have the...
The current yield curve for default-free zero-coupon bonds is as follows: Maturity (Years) 10 YTM (%) 10.5% 11.5 12.5 points a. What are the implied 1-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal places.) eBook Forward Rate Maturity 2 years 3 years Print References b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will be the yield to maturity on 1-year zero-coupon bonds next...
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