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When all else is equal, interest rate risk is smaller with:
a) a longer original maturity.
b) a shorter remaining maturity.
c)a longer remaining maturity
d) a shorter original maturity.
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- 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 defaultAt any point in time forward rates computed by the yield curve represent the market's best estimates about the future course of short-term interest rates. Hence, for an individual investor who has a one-period investment horizon, it makes no difference what the term to maturity is on the individual security purchased. True/false?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…
- Which of the following statements is correct? A.) A flat yield curve occurs when the yield-to-maturity is virtually unaffected by the term-to-maturity. B.) Real interest rates are generally lower than nominal interest rates. C.) Liquidity risk is the risk that a security may be difficult to sell on short notice for its true value. D.) All of these statements are correct.The normal yield curve states that long-term investors are compensated for which risk? A Maturity risk B Default risk C Sovereign risk D None of the aboveAssuming 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.
- Explain risk-free interest rate (the nominal short-term rate)Which of the following is not a determinant of interest rates? a) The Required Rate of Return b) The Liquidity Risk Premium c) The Re-investment Risk Premium d) The Maturity Risk Premium e) None of the aboveSome 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 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.Explain whether you agree or disagree with the following statement: “The riskless interest rate is the real short-term interest rate that would prevail if there were no transitory financial disturbances.Most evidence suggests that a positive maturity risk premium exists. How would thisaffect your calculations when determining interest rates?