Reference no: EM132819948

Explain how inflation affects interest rates. What is the Fisher effect? What does it assume ?

Explain the meaning of the phrase term structure of interest rates. What is a yield curve? What assumptions are necessary to construct a yield curve?.

Explain the meaning and importance of the concept of duration.

Exactly what are junk bonds? Why are they issued? How does their actual yield compare to their degree of default risk? Why do you think this is so?

What is a call privilege? Why is this privilege an advantage to a security issuer and a disadvantage to a buyer of financial instruments?

What types of risk are encountered by a purchaser of callable securities?

What exactly is prepayment risk? What factors lead to an increase in prepayment risk?

Describe the relationship between changes in economic activity and market interest rates. Why is it that interest rates usually rise during periods of economic expansion and fall when the economy is headed down into a recession?

How can the marketplace's expectations be used as a guide to anticipate future changes in interest rates? What are the pitfalls in using such an expectations approach as a forecasting tool?

What is interest-rate hedging? What is its goal?

How do the spot (cash) markets differ from futures (forward) markets?

What is basis? Explain how the basis for a futures contract relates to trading risk.