at inflation is expected to steadily increase in the years ahead, but that the real risk-free rate r*, is expected to remain constant. Which of the following statements is most correct? None of the answers are correct. The treasury yield curve must be upward sloping. If the expectations theory holds, the treasury yield curve must be downward sloping

at inflation is expected to steadily increase in the years ahead, but that the real risk-free rate r*, is expected to remain constant. Which of the following statements is most correct? None of the answers are correct. The treasury yield curve must be upward sloping. If the expectations theory holds, the treasury yield curve must be downward sloping

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 4QTD

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Similar questions

Which of the following statements is true? If investors believe inflation will be subsiding in the future, the prevailing yield curve will have a positive slope. The longer the maturity of a security, the greater its interest rate risk. The interest rate risk premium always adds a downward bias to the slope of the yield curve. The real rate of interest varies with the business cycle, with the lowest rates at the end of a period of business expansion and the highest at the bottom of a recession.
Which of the following statements is CORRECT? a. If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices. b. The total yield on a bond is derived from dividends plus changes in the price of the bond. c. Bonds are generally regarded as being riskier than common stocks, therefore bonds have higher required returns. d. Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies. e. The market price of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant. THE ANSWER IS NOT E OR B, apparently, but please let me know if you really think one of those choices are correct.
Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? Calculate the expected rate of return and standard deviation for each investment. Which investment would you prefer?
Consider the following scenario analysis A. Is it reasonable to assume that treasury bonds will provide higher returns in recessions than in booms? B. Calculate the expected rate of return and standard deviation for each investment. C. What investment would you prefer?
Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRF. Meanwhile, investors are afraid of a recession, so the market risk premium, (rM - rRF), has increased. Under these conditions, with other things held constant, which of the following statements is most correct and why? A. The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0. B. The prices of all stocks would decline, but the decline would be greatest for the highest-beta stocks. C. The prices of all stocks would increase, but the increase would be greatest for the highest-beta stocks. D. The required return on all stocks would increase by the same amount.
Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRF. Meanwhile, investors are afraid of a recession, so the market risk premium, (rM − rRF), has increased. Under these conditions, with other things held constant, which of the following statements is most correct? a. The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0. b. Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices. c. The prices of all stocks would decline, but the decline would be greatest for high-beta stocks. d. The prices of all stocks would increase, but the increase would be greatest for high-beta stocks. e. The required return on all stocks would increase by the same amount.
Which of the following best explains an upward sloping Treasury yield curve? A. Maturity risk is expected to decline in the future B. Long-term interest rates are more volatile than short-term rates C. Inflation risk premiums are higher for longer terms to maturity D. Default risk is higher for longer terms to maturity
Which of the following statements is the least accurate? a. Security returns are composed of cash returns and capital gains. b. When the shareholder’s required rate of return is higher than ROE, a company can increase the stock price by retaining and reinvesting more. c. The geometric average return is always smaller than or equal to the arithmetic average return. d. When the coupon rate is smaller than the yield to maturity, a bond sells below par (discount).
What can you tell just by looking at the above yield curve? Group of answer choices An expectation of falling interest rates suggests trouble in the economy, a rise in bond prices, and a decline for stocks. The economy is expected to do well in the short-run. A correction in bond prices is expected. Bond prices are expected to decline and so the stock market should do extremely well.
Which statement is TRUE regarding the riskiness of money market instruments and capital market instruments? * Changing economic prospects can cause very large changes in current stock values. Distant cash flows for stocks can be known with certainty, make them riskier than money market instruments. Money market instruments have predictable cash flows and mature in one year or less, so they are much more risky. The prices of long-term capital market instruments are less sensitive to changes in interest rates than prices of short-term instruments.
Assume that inflation is expected to rise soon. How could this affect future bond prices? Would you recommend that financial institutions increase or decrease their concentration in long-term bonds based on this expectation?
Assuming the pure expectations theory is correct, an upward-sloping yield curve implies:a. Interest rates are expected to increase in the future.b. Longer-term bonds are riskier than short-term bonds.c. Interest rates are expected to decline in the future.