Homework Answers
1.
Liquidity preference theory
2.
The forward curve lies above the spot curve and the yield to
maturity will be lower than the spot rate with the same
maturity
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An economist expects short-term rates to remain unchanged over the next several years. The economist would...
Which of the following statements about the term structure of interest rates is incorrect? A. According...
Which of the following statements about the term structure of interest rates is incorrect? A. According to the Liquidity Preference Theory, long-term interest rates are usually higher than short-term interest rates. B. The Market Segmentation Theory posits that bonds of different maturities are traded by different investors and their prices/yields are determined separately. C. The Pure Expectations Theory asserts that the yield curve is explained solely by investors' interest rate expectations. D. According to the Pure Expectations Theory, an upward...
If the expectation of short-term interest rate remains the same in the future, the expectations theory...
If the expectation of short-term interest rate remains the same in the future, the expectations theory predicts that the yield curve will be while the liquidity preference theory predicts that the yield curve will be_ A B. C. D. Flat; flat Upward sloping; upward sloping Flat; upward sloping Upward sloping; flat The market capitalization rate on the stock of Aberdeen Wholesale Company is 12%. Its expected ROE is 10% am dots expected EPS is $3.00. if the firm's plow-back ratio...
Which of the following is correct? A. The maturity premiums embedded in the interest rates on...
Which of the following is correct? A. The maturity premiums embedded in the interest rates on us treasury securities are due primarily to the fact that the probability of default is lower on long-term bonds than on short-term goals. B. If the maturity risk premium were zero and the rate of inflation were expected to increase in the future, then the yield curve for us treasurt securities would, other things held constant, have an upward slope. C. According to the...
The real risk-free rate, r*, is expected to remain constant at 3% per year. Inflation is expected...
The real risk-free rate, r*, is expected to remain constant at 3% per year. Inflation is expected to be 2% per year forever. Assume that the expectations theory holds; that is, there is no maturity risk premium. Treasury securities do not require any default risk or liquidity premiums. Which of the following is most correct? The Treasury yield curve is flat and all Treasury securities yield 5%. The Treasury yield curve is upward sloping for the first 10 years, and then downward sloping....
- - higher interes in the long-term where My Pe Theory Market Netto They The Curve...
- - higher interes in the long-term where My Pe Theory Market Netto They The Curve Theory None of the above fequitymarkets are strong form Micient Investors should chose quity portfolios randomly Investors should put money only in professionally managed equity portfolios Investors should not invest in equity securities Investors should invest in stocks with high P raties Investors should form portfolios that are well diversified and appropriate for their own levels of risk tolerance TO To apply the Dividend...
The yield to maturity on one-year zero-coupon bonds is 8.2%. The yield to maturity on two-year zero-coupon bonds is 9.2%. a. What is the forward rate of interest for the second year? (Do not round in...
The yield to maturity on one-year zero-coupon bonds is 8.2%. The yield to maturity on two-year zero-coupon bonds is 9.2%. a. What is the forward rate of interest for the second year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Forward rate of interest b. If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year? (Do not r answer to 2 decimal...
Analysts predict that short-term interest rates over the next 4 years will be as follows: 1.5%,...
Analysts predict that short-term interest rates over the next 4 years will be as follows: 1.5%, 5.5%, 8%, and 3.5%, respectively. According to expectations theory, the yield on a discount bond with a three year maturity will be ____ and yield on bond with a four year maturity will be ____. Group of answer choices 5.5%; 4.63% 5.5%; 4.25% 5%; 4.63% 5%; 4.25%
2. You want to know what 2-year spot rates will be one year from now. According...
2. You want to know what 2-year spot rates will be one year from now. According to the pure expecta- tions theory, this unknown forward rate of interest is implied by current spot rates. The simplest method of calculating this forward rate is to use today's 1-year and 3-year spot rates; i.e., the spot rates that take you out to the start of, and to the end of the forward period of time you are interested in. Thus: (1 +...
The real risk-free rate of interest is expected to remain constant at 3% for the foreseeable...
The real risk-free rate of interest is expected to remain constant at 3% for the foreseeable future. However, inflation is expected to increase steadily over the next 30 years, so the Treasury yield curve has an upward slope. Assume that the pure expectations theory holds. You are also considering two corporate bonds, one with a 3-year maturity and one with a 5-year maturity. Both have the same default and liquidity risks. Given these assumptions, which of these statements is CORRECT?...
The real risk-free rate of interest is expected to remain constant at 2.5% for the foreseeable...
The real risk-free rate of interest is expected to remain constant at 2.5% for the foreseeable future. However, inflation is expected to increase steadily over the next 30 years, so the Treasury yield curve has an upward slope. Assume that the pure expectations theory holds. You are also considering two corporate bonds, one with a 3-year maturity and one with a 5-year maturity. Both have the same default and liquidity risks. Given these assumptions, which of these statements is CORRECT?...
If the expectation of short-term interest rate remains the same in the future, the expectations theory predicts that the yield curve will be while the liquidity preference theory predicts that the yield curve will be_ A B. C. D. Flat; flat Upward sloping; upward sloping Flat; upward sloping Upward sloping; flat The market capitalization rate on the stock of Aberdeen Wholesale Company is 12%. Its expected ROE is 10% am dots expected EPS is $3.00. if the firm's plow-back ratio...
- - higher interes in the long-term where My Pe Theory Market Netto They The Curve Theory None of the above fequitymarkets are strong form Micient Investors should chose quity portfolios randomly Investors should put money only in professionally managed equity portfolios Investors should not invest in equity securities Investors should invest in stocks with high P raties Investors should form portfolios that are well diversified and appropriate for their own levels of risk tolerance TO To apply the Dividend...
The yield to maturity on one-year zero-coupon bonds is 8.2%. The yield to maturity on two-year zero-coupon bonds is 9.2%. a. What is the forward rate of interest for the second year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Forward rate of interest b. If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year? (Do not r answer to 2 decimal...
2. You want to know what 2-year spot rates will be one year from now. According to the pure expecta- tions theory, this unknown forward rate of interest is implied by current spot rates. The simplest method of calculating this forward rate is to use today's 1-year and 3-year spot rates; i.e., the spot rates that take you out to the start of, and to the end of the forward period of time you are interested in. Thus: (1 +...
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