EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 15, Problem 2PS
Summary Introduction
To determine: Whether the given statement is true or false with reason is to be determined.
Introduction : The
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If the yield curve is downward sloping, what would the expectations theory suggest about expected future short-term interest rates?
Which of the following is consistent with the pure expectations theory of the yield curve? Check all that apply.
A downward-sloping yield curve suggests that the market thinks interest rates in the future will be higher than they are today.
✓ A downward-sloping yield curve suggests that the market thinks interest rates in the future will be lower than they are today.
A flat yield curve suggests that the market thinks interest rates in the future will be the same as they are today.
A flat yield curve suggests that the market thinks interest rates in the future will be higher than they are today.
Maria would like to invest a certain amount of money for two years and considers investing in a one-year bond that pays 6 percent and a two-year
bond that pays 9 percent. Maria is considering the following investment strategies:
Strategy A: In the first year, buy a one-year bond that pays 6 percent. Once that bond matures, buy another one-year bond that pays
the forward rate.
Strategy B: In the…
Which of the following best explains an upward sloping Treasury yield curve?
A. Maturity risk is expected to decline in the future
B. Long-term interest rates are more volatile than short-term rates
C. Inflation risk premiums are higher for longer terms to maturity
D. Default risk is higher for longer terms to maturity
Chapter 15 Solutions
EBK INVESTMENTS
Ch. 15 - Prob. 1PSCh. 15 - Prob. 2PSCh. 15 - Prob. 3PSCh. 15 - Prob. 4PSCh. 15 - Prob. 5PSCh. 15 - Prob. 6PSCh. 15 - Prob. 7PSCh. 15 - Prob. 8PSCh. 15 - Prob. 9PSCh. 15 - Prob. 10PS
Ch. 15 - Prob. 11PSCh. 15 - Prob. 12PSCh. 15 - Prob. 13PSCh. 15 - Prob. 14PSCh. 15 - Prob. 15PSCh. 15 - Prob. 16PSCh. 15 - Prob. 17PSCh. 15 - Prob. 18PSCh. 15 - Prob. 19PSCh. 15 - Prob. 1CPCh. 15 - Prob. 2CPCh. 15 - Prob. 3CPCh. 15 - Prob. 4CPCh. 15 - Prob. 5CPCh. 15 - Prob. 6CPCh. 15 - Prob. 7CPCh. 15 - Prob. 8CPCh. 15 - Prob. 9CPCh. 15 - Prob. 10CP
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- An efficient capital market is best defined as a market in which security prices reflect which one of the following? Multiple Choice A Current inflation B A risk premium C All available information D The historical arithmetic rate of return E The historical geometric rate of returnarrow_forwardSuppose 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.arrow_forwardThe expected return on the market is the risk-free rate plus the A. diversified returns B. equilibrium risk premium C. historical market return D. unsystematic returnarrow_forward
- The expected return on the market is the risk-free rate plus the A. diversified returns B. equilibrium risk premium C. historical market return D.unsystematic returnarrow_forwardConsider the liquidity premium theory. If a yield curve looks like the one shown here, what is the market predicting about the movement of future short-term interest rates? Distinguish between the flat part of the curve and the part with the increasing slope. Yield to maturity Term to maturityarrow_forwardThe market risk premium is computed by: subtracting the risk-free rate of return from the market rate of return. adding the risk-free rate of return to the market rate of return. subtracting the risk-free rate of return from the inflation rate. adding the risk-free rate of return to the inflation rate. multiplying the risk-free rate of return by a beta of 1.0.arrow_forward
- Suppose the real risk-free rate and inflation rate are expected to remain at their current levels throughout the foreseeable future. Consider all factors that affect the yield curve. Then identify which of the following shapes that the US Treasury yield curve can take. Check all that apply. Downward-sloping yield curve Inverted yield curve Upward-sloping yield curve Identify whether each of the following statements is true or false. StatementS True False If inflation is expected to decrease in the future and the real rate is expected to remain steady, then the Treasury yield curve is downward sloping. (Assume MRP = 0.) All else equal, the yield on new bonds issued by a leveraged firm will be less than the yield on the new bonds issued by an unleveraged firm. The yield curve for a BBB-rated corporate bond is expected to be above the US Treasury bond yield curve. Yield curves of highly liquid assets will be lower than yield curves of relatively illiquid assets.arrow_forwardAccording to the ,long-term interest rates are a function of expected short-term interest rates Maturity theory Expectations theory Market segmentation theory Preferred habitat theoryarrow_forwardAssuming 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.arrow_forward
- At 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?arrow_forwardStandard deviation is measure of total risk while BETA is measure of systematic, undiversifiable risk. O True O False O Depends on the variancearrow_forwardWhy do we discount the future in valuing investments today that are expected to provide returns in the future? Explain with examples. Define & explain Annual Percentage Rate (APR) & the Effective Annual Rate (EAR). What is the relationship between APR & EAR? The discounting of the future is assumed to be exponential. What does behavioral finance have to say about this assumption? What is hyperbolic discounting?arrow_forward
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