34. Thirty-year Treasury bonds typically have a higher yield to maturity than two-year Treasury bonds due to a. default risk b. government deficits c. interest rate risk d. the cost of issuing long-term Treasury bonds ro ic different from the oun ions thooru 25 The liquiditu promium thoors of the form
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- The respective maturities of these newly issued debt instruments are approximately equivalent. Which one of the investments in the portfolio would be subject to the greatest relative amount of price volatility if interest rates were to change quickly a. Treasury bond.b. Zero-coupon bond.c. Corporate bond.d. Municipal bond.Calculating the risk premium on bonds The text presents a formula where (1+1) = (1-p)(1 +i+x) + p(0) where i is the nominal interest rate on a riskless bond x is the risk premium p is the probability of default (bankruptcy) If the probability of bankruptcy is zero, the rate of interest on the risky bond is When the nominal interest rate for a risky borrower is 8% and the nominal policy rate of interest is 3%, the probability of bankruptcy is %. (Round your response to two decimal places.) When the probability of bankruptcy is 6% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) When the probability of bankruptcy is 11% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) The formula assumes that payment upon default is zero. In fact, it is often positive. How would you change the formula in this case?…You are given the following data: Real Risk-Free Rate 4% Constant inflation premium 7% Maturity risk premium 1% Default risk premium for AAA bonds 3% Liquidity premium for long term T bonds 2% Assume that a highly liquid market does not exist for long term bonds, and the expected rate of inflation is constant. Given these conditions: a. nominal risk-free rate for T bills is? b. the rate of the long term treasury bonds is?
- 7. A. Define duration and explain how duration is used in the management of a portfolio of financial securities. B. Why is duration a better measurement of interest rate risk than the time it takes to reduce the principal balance on a loan by 50%? C. How does maturity and yield affect the sensitivity of a financial security to changes in interest rates?According to the expectations theory of the term structure, O a when the yield curve is steeply upward-sloping, short-term interest rates are expected to rise in the future. O b. when the yield curve is downward-sloping, short-term interest rates are expected to decline in the future. O c. buyers of bonds prefer short-term to long-term bonds. O d. all of the above. O e. only A and B of the above.The yield to maturity reported in the financial pages for Treasury securities Multiple Choice is calculated by doubling the semiannual yield. is calculated by doubling the semiannual yield and is also called the bond equivalent yield. is calculated as the yield-to-call for premium bonds. is calculated by compounding the semiannual yield. is also called the bond equivalent yield.
- A plot of the yields on bonds with different terms to maturity but the same risk, liquidity, and tax considerations is known as O A. a yield curve. B. a risk-structure curve. OC. a term-structure curve. 5- O D. an interest-rate curve. Suppose people expect the interest rate on one-year bonds for each of the next four years to be 3%, 6%, 5%, and 6%. If the expectations theory of the term structure of interest rates is correct, then the implied interest rate on bonds with a maturity of four years is nearest whole number). %. (Round your response to the 2- Refer to the figure on your right. Suppose the expected interest rates on one-year bonds for each of the next four years are 4%, 5%, 6%, and 7%, respectively. 1. 1.) Use the line drawing tool (once) to plot the yield curve generated. 3 Term to Maturity in Years 2.) Use the point drawing tool to locate the interest rates on the next four years. 5. 3- Interest Rate .....In Chapter 7, we saw that if the market interest rate, rd, for a given bond increased, the price of the bond would decline. Applying this same logic to stocks, explain (a) how a decrease in risk aversion would affect stocks prices and earned rates of return, (b) how this would affect risk premiums as measured by the historical difference between returns on stocks and returns on bonds, and (c) what the implications of this would be for the use of historical risk premiums when applying the SML equation.A bond’s expected return is sometimes estimated by its yield to maturity (YTM) and sometimes by its yield to call (YTC). The YTC is a better estimate when the bond sells at... a. a discount. b. a premium. c. par value.
- 3. A. Rank the following financial securities in order of interest rate risk (1 being the lowest and 3 being the highest).a. 10-year traditional coupon bondb. 10-year zero-coupon bondc. 10-year fully amortizing loan B. Rank the following financial securities in order of reinvestment risk (1 being the lowest and 3 being the highest).d. 10-year traditional coupon bonde. 10-year zero-coupon bondf. 10-year fully amortizing loan6. Risks of investing in bonds The higher the risk of a security, the higher its expected return will be. A bond's risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important. The following graph shows the relationship between interest rates and maturity for three security classes: US Treasury securities (USTS), AA-rated corporate bonds, and BBB-rated corporate bonds. Use the selection dropdown lists to correctly associate each curve with its corresponding security class: A B с YIELD (%) 15 12 9 6 3 0 5 10 Interest rate risk Reinvestment risk True 15 False 20 YEARS TO MATURITY 25 30 Frank Barlowe is retiring soon, so he's concerned about his investments providing him with a steady income every year. He's aware that if interest rates , the potential earnings power of the cash flow from his investments will increase. In particular, he is concerned that a decline in interest rates might lead to annual income from his…8. Risks of investing in bonds The higher the risk of a security, the higher its expected return will be. A bond’s risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important. The following graph shows the relationship between interest rates and maturity for three security classes: US Treasury securities (USTs), AA-rated corporate bonds, and BBB-rated corporate bonds. Use the selection dropdown lists to correctly associate each curve with its corresponding security class: A B C Frank Barlowe is retiring soon, so he’s concerned about his investments providing him with a steady income every year. He’s aware that if interest rates , the potential earnings power of the cash flow from his investments will increase. In particular, he is concerned that a decline in interest rates might lead to annual income from his investments. What kind of risk is Frank most concerned about…