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Contraction risk is the risk that loan principal will be repaid more rapidly than expected, typically when interest rates have increased.
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- How is the market interest rate in the short-term and long-term financial market affected under the Pure Expectations theory when suppliers and users of loanable funds expect that interest rates will decrease the next year?Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic Component Symbol This is the premium that reflects the risk associated with changes in interest rates for a long-term security. It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people’s time preferences for consumption. This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. It is calculated by adding the inflation premium to r*. Over the past several years, Germany, Japan, and Switzerland have had lower interest rates than the United States due to lower values of this premium. It is based on the bond’s rating; the higher the rating, the lower the premium added, thus lowering…Interest rate risk is the potential for investment ( ) that result from a change in interest rates. If interest rates ( ) , for instance, the value of a bond or fixed-income instrument will decline.
- The increased change in value that occurs because longer maturity investments are affected more by interest rate changes than are shorter maturity investments is called Blank______ risk. Multiple choice question. maturity interest rate reinvestment rate defaultWhen borrowers tend to pay back the loans to bankers earlier, the bank is facing a. Repricing risk b. Yield curve risk c. Basis points risk d. Embedded options riskIs it correct to state that banks’ returns will be higher if interest rates increase? Outline the advantages and drawbacks of Gap analysis and Duration analysis.
- When the quantity of a financial security supplied or demanded changes at every given interest rate in response to a change in a factor, this causes a shift in the supply or demand curve true or false ?Is default risk premium likely to be pro-cyclical (i.e., increasing during economic expansion) or counter-cyclical (i.e., increasing during the economic recession)? Why?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?
- Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic Component Symbol This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. It is based on the bond’s rating; the higher the rating, the lower the premium added, thus lowering the interest rate. It is calculated by adding the inflation premium to r*. It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people’s time preferences for consumption. As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty. This premium is added when a security lacks marketability,…Which of the following statements regarding fixed-rate loans is true? Group of answer choices a. Fixed-rate loans are preferable if interest rates are expected to rise. b. The cost of fixed-rate loans increases with an increase in the market interest rate. c. The cost of fixed-rate loans decreases with a decrease in the market interest rate. d. Fixed-rate loans are preferable if interest rates are expected to fall. e. Fixed-rate loans have periodic adjustment dates, at which time the interest rate and monthly payment are adjusted as necessary.Explain risk-free interest rate (the nominal short-term rate)
