Reference no: EM132889968

Structure Of Interest Rates

Characteristics That Affect Security Yields. Identify the relevant characteristics of any security that can affect the security's yield.

Impact of Credit Risk on Yield. What effect does a high credit risk have on securities?
Impact of Liquidity on Yield. Discuss the relationship between the yield and liquidity of securities

Tax Effects on Yields. Do investors in high tax brackets or those in low tax brackets benefit more from tax-exempt securities? Why? Do municipal bonds or corporate bonds offer a higher before-tax yield at a given point in time? Why? Which has the higher after-tax yield? If taxes did not exist, would Treasury bonds offer a higher or lower yield than municipal bonds with the same maturity? Why?

Pure Expectations Theory. Explain how a yield curve would shift in response to a sudden expectation of rising interest rates, according to the pure expectations theory.

Forward Rate. What is the meaning of the forward rate in the context of the term structure of interest rates? Why might forward rates consistently overestimate future interest rates? How could such a bias be avoided?

Pure Expectations Theory. Assume there is a sudden expectation of lower interest rates in the future. What would be the effect on the shape of the yield curve? Explain.

Liquidity Premium Theory. Explain the liquidity premium theory.

Segmented Markets Theory. If a downward-sloping yield curve is mainly attributed to segmented markets theory, what does that suggest about the demand for and supply of funds in the short-term and long-term maturity markets?

Yield Curve. What factors influence the shape of the yield curve? Describe how financial market participants use the yield curve.

Segmented Markets Theory. Suppose that the Treasury decided to finance its deficit with mostly long-term funds. How could this decision affect the term structure of interest rates? If short-term and long-term markets are segmented, would the Treasury's decision have a more or less pronounced impact on the term structure? Explain.

Effect of Crises on the Yield Curve. During some crises, investors shift their funds out of the stock market and into money market securities for safety, even if they do not fear rising interest rates. Explain how and why these actions by investors affect the yield curve. Is the shift due to the expectations theory, liquidity premium theory, or segmented markets theory?