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- Explain what a first-to-default credit default swap is. Does its value increase or decrease as the default correlation between the companies in the basket increases? Explain.Which of the following is NOT an external method of interest rate risk management? * A. Using an interest rate swap B. Using financial futures C. Using an off-balance-sheet strategy, such as a forward rate agreement D. Having fixed-interest assets financed by fixed-interest liabilities and equitySuppose an investor observes an upward term structure of interest rate. Answer the followingquestions. (a) According to the expectation hypothesis, what will be the investor’s forecast about futurechange of interest rate (increase, decrease or unchanged)? (b) What will the investor say about the future change of interest rate according to liquiditypreference theory? Explain your argument.
- How can a company offset risk using interest rate swaps?Which one of the following statements about the term structure of interest rates is true? A) The expectations hypothesis predicts a flat yield curve if anticipated future short-term rates exceed current short-term rates. B) The liquidity premium theory contends that lenders prefer to buy securities at the ghort-term end of the curve. C) The expectations hypothesis contends that the long-term spot rate is equal to the short-term rate. D) The liquidity premium theory indicates that, all else being equal, longer maturity bonds will have lower yields.Which of the following most accurately describes the behavior of credit default swaps?a. When credit risk increases, swap premiums increase.b. When credit and interest rate risk increase, swap premiums increase.c. When credit risk increases, swap premiums increase, but when interest rate risk increases, swap premiums decrease.
- What happens to market-clearing, or equilibrium, interest rates in a capital marketwhen the supply of funds declines? What happens when expected inflationincreases or decreases?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.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
- Is the price of a long term bond or the price of a short term security more sensitive to a change in interest rates? Why?Why should we care what the Term Structure of Interest Rates looks like? The Expectations Theory of the Term Structure of Interest Rates implies that the term structure is the result of expected inflation rates in the future. What else might cause the term structure to be what it is, that might not be in the Expectations Theory?Which of the following statement is true a. Gold generally provides a hedge against inflation over long periods of time b. Capital market is the market for short and long-term fixed income securities c. Investment in real estate is liquid d. Money market is the market for short and long-term fixed income securities