Answered: Is default risk premium likely to be…

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

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter5: Risk Analysis

Section: Chapter Questions

Problem 8QE

See similar textbooks

Related questions

Q: If there is inflation how does this affect LIFO reserves? Does it increase or decrease it?

A: LIFO Last-in-first out is a method used to issue material. It is a method of pricing the issues of…

Q: What happens to market-clearing, or equilibrium, interest rates in a capital marketwhen the supply…

A: The market-clearing, or equilibrium, interest rates in a capital market are impacted by the fund…

Q: How low can nominal interest rates go? Explain why they can become negative.

A: The nominal interest rate is the interest rate that is calculated before inflation is factored in.…

Q: How do risk and inflation impact interest rates in the economy?

A: Introduction: The inflation needs to be adjusted in the interest rate of mortgage payments. Due to…

Q: Would you recommend that financial institutions increase or decrease

A: It is favourable to increase their concentration on long term bonds before inflation declines…

Q: (a) Compare the performance of these size premiums with the global market premium over this period.…

A: Size Premium means Smaller sized market Cap firms are expected to outperform larger sized market cap…

Q: Can nominal interest rates be negative?

A: Nominal interest rate is the rate that is paid to lender for the amount or money borrowed.

Q: How does the price level adjusted mortgage (PLAM) address the problem of uncertainty in inflationary…

A: Price level adjusted mortgage helps in reducing the interest rate risk and effects of inflation on…

Q: How do investors deal with inflation when they determine interest rates in the financial markets?

A: Introduction: Inflation is an increase in the overall level of prices of products in the economy…

Q: How does inflation affect interest rates, security prices, and financial planning?

A: Inflation is the situation in the economy due to which prices of goods and services increases, as a…

Q: What will be Effects of Changes in Capital Market Conditions on “Going-In” Cap Rates?

A: Answer: Going in cap rates teaches investors regarding the dividend they receive on the purchased…

Q: If the inflation rate is expected to remain constant at the current level in the future,would the…

A: If the inflation is to remain constant than the yield curve will remain horizontal because the YC is…

Q: Determine if a fixed or a floating debt rate should be used during a recession.

A: A fixed debt rate is the interest rate that remains the same over the lifetime of the debt…

Q: Why interest rate tends to increases before the crisis and then decline during the crisis? (refer to…

A: During financial crisis the value of financial instruments and assets reduce significantly. To…

Q: What effects do relative inflation rates have on relative interest rates?

A: Relative Inflation Rates can be defined as the rates of inflation and exchange rates established…

Q: Which tend to be more volatile, short- or long-term interest rates? Long-term interest rates…

A: short term interest rates are more volatile than long term interest rate.

Q: Would the market-value debt ratio tend to be higher than the book-value debt ratioduring a stock…

A: The debt ratio is the financial ratio that evaluates the percentage of assets held by the company…

Q: What is the concept of present value? How does it affect inflation

A: Increase in general price levels in an economy is known as inflation. Due to inflation, the cost of…

Q: What is the Relationship between Changes in Interest Rates, Investor Returns, and “Going-In”Cap…

A: The question is based on the concept of relation between change in interest rate and its impact on…

Q: Determine whether the following statements are TRUE or FALSE. Briefly explain your answers. (a)…

A: The yield is inversely proportional to price. When the price is equal to par value, yield is equal…

Q: Suppose interest rates in the economy increase. How would such a change affect the costs of both…

A: In Finance, the Capital Asset Pricing Model is a model used to determine a theoretically appropriate…

Q: The real rate of return is related to O The risk-free rate The risk-free and the inflation rate The…

A: Real rate of returnAn annual profit percentage that is earned on the investment, being adjusted for…

Q: INTEREST RATE RISK In the context of the repricing gap model, what is the spread effect? How does…

A: The repricing gap model is based on the consideration that a bank's exposure to interest rate risk…

Q: Discuss the factors that influence interest rates, and why interest rates are so critical to…

A: The interest rates in an economy refer to the rate that is charged by the lender while lending the…

Q: What effect does relative inflation have on interestrates and exchange rates?

A: Inflation is general increase in the prices. Inflation directly affects the exchange rate and…

Q: Consider the money market. What happens and why to interest rates during an economic expansion…

A: During business cycle expansion, there is an increase in income, employment, and real output with in…

Q: Assume that the risk-free rate increases, but the market risk premium remains constant. What impact…

A: The cost of debt is the productive interest rate paid by an undertaking on its debts. It is interest…

Q: Why inflation is considered and have effect in present value?

A: Inflation is the increase in the general price level of the country. It is an important indicator of…

Q: a. What payoff do bondholders expect to receive in the event of a recession? b. What is the promised…

A: Bondholders: They are holders of bonds and receive coupon payments and the principal amount for…

Q: During times of rising inflation, are investments with fixed returns like a bond or bank CD…

A: Inflation is the time in the economy when consumer prices of goods and services are high enough and…

Q: Define the term recession?

A: Recession: When an entire economy performs poorly (i.e. having a negative performance or decline in…

Q: When does the present economy studies do or use? a. When interest rate is not given b. When time…

A: Economy studies is defined as the study, which used to provide the framework as well as the ten most…

Q: What makes it so difficult to correctly forecast interest rate changes?

A: Interest rates are used to understand price and value of money. Interest rate is the cost incurred…

Q: Convexity is the difference between O actual price change and duration-predicted price change O…

A: Convexity measures the curvature

Q: What is a “liquidity premium?” When do investors increase their attention to such a premium?

A: LIQUIDITY PREMIUM A liquidity premium is an additional value that the investors demand when the…

Q: What is the role of the Federal Reserve with interest rates during a recession?

A: Federal bank is central bank whose main function is maintaining enough liquidity in system so that…

Q: Why do the prices of fixed-rate bonds fall if expectations for inflation rise?

A: Bond is financial security used by organizations to raise debt funds. Bond carries fixed coupon that…

Question

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?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

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.
Why interest rate tends to increases before the crisis and then decline during the crisis? (refer to image)
Which of the following is the risk due to inflation? Business risk Financial risk Market risk Interest rate risk Purchasing power risk Exchange rate risk
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 ?
According to the ,long-term interest rates are a function of expected short-term interest rates Maturity theory Expectations theory Market segmentation theory Preferred habitat theory
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?
What is the relationship between forward rates and the market’s expectation of future short rates? Explain in the context of both the expectations hypothesis and the liquidity preference theory of the term structure of interest rates.
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?
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…
What happens during periods when the market volatility is so significant? How are large swings dealt with?
If the yield curve is downward sloping, what would the expectations theory suggest about expected future short-term interest rates?