Question

a) The discount rate b) The coupon rate e) The federal funds rate d) The real interest rate. TO) Which of the following statements et explain the relationship between corporate bond ratings and interest rates? A corporate bond with a higher rating tends to pay a lower interest rate than a comparable bond with a lower rating only when there is greater demand for the bond with the higher rating b) A corporate bond with a higher rating tends to pay the same interest rate as a comparable bond with a lower rating based on similar levels of supply and demand for each bond e) A corporate bond with a higher rating tends to pay a lower interest rate than a comparable bond with a lower rating. d) A corporate bond with a higher rating tends to pay a higher interest rate than a comparable bond with a lower rating. 11) You have $5.000,00 available for deposit into a savings account today and can choose to make the deposit in an account that offers either simple or compounded interest. If both accounts offer an 8.5% annual interest rate and you require the funds in 5 years, what will be the difference between the final balances in each account? a) $67.42 b) $189.17 c) $393.28 d) No difference. 12) The "Equation of Exchange" is best described as: a) V = M*Q b) Y=C+ S + T c) M*V =P*Y d) Nominal ER = Real ER / Inflation 13) According to the Expectations Theory of term structure: a) Investors prefer short term bonds and must be given an incentive to purchase long term b) When the yield curve has a steep upward slope short term interest rates are expected to the future. c) When the yield curve has a steep downward slope short term interest rates are expecte about the same in the future. d) All of the above are consistent with the Expectations Theory of term structure. 14) Which of the following statements can be considered to be generally true regardin of bonds?

Answer 1

10.

(a) A corporate bond with a higher rating tends to pay a lower interest rate than a comparable bond with a lower rating only when there is greater demand for the bond with the higher rating.

This is true as bonds with higher rating have lower risk and thus have lower interest rates while bonds with lower rating have a higher risk and thus have interest rates, this is what happens when people are rational, that is they demand bonds with a higher rating and lower risk.

11.

(c). P = $5000

r = 0.085

t = 5 years

Simple Interest = P x r x t

SI = 5000 x 0.085 x 5 = $2125

Total amount = $7125

Using compound interest,

Total amount = 5000 (1.085)^5 = $7518.28

Diference between the final amounts is 7518.28 - 7125 = $393.28

12.

(c). MV = PY

This equation represents the quantity theory of money. given by Irving Fisher.

This equation gives a relationship between price level, money supply, the velocity of money and expenditures.

13.

(b). It can be said that when interest rates are lower, there is higher yield and these have a negative relationship.

Thus according to expectations theory, when the yield curve has a steep upward slope, then interest rates are expected to decrease in the future.