Finance CH 6 DSM All questions
The theory that postulates the shape of the yield curve is determined by the fact that investors require an interest premium to compensate them for the risks of holding longer term debt is known as:
Liquidity Preference theory.
Which theory postulates that the shape of the yield curve is determined by the supply and demand for different maturities of debt.
Market Segmentation Theory
A zero-coupon bond pays no interest payments to the bondholder. It has a $1,000 par value and matures in 5 years. What is the value of this bond if the market rate of interest on similar risk bonds is 10%?
PV = 1000/(1+0.10)^5 = 620.92
A yield curve can be constructed using similar risk corporate bonds. The yield curves constructed with corporate bonds will __________ the U.S. Treasury yield curve.
Plot Above - The distance between the U.S. Treasury yield curve and the corporate bond yield curve represents the default risk premium since U.S. Treasuries are considered risk free. This default risk premium is also known as the default spread.
Which theory maintains that interest rates are based on expectations of what yields will be in the future.
Pure expectations theory
In the event a firm goes bankrupt, an investment grade senior debenture bond is more likely to receive liquidation proceeds than:
Subordinated Debenture
The __________ is a graphical representation of the term structure of interest rates.
Yield Curve
Default risk is the risk that:
bond interest payments or the principal payment will not be made.
The risk-free rate of interest is used in a number of financial models. The best approximation for the risk-free rate is:
short-term U.S. Treasuries
Subordinated debentures are:
unsecured bonds with a junior claim on assets
Interest Rate Risk ------ as the time to maturity for a bond increases.
Increases.
A steeply upward-sloping yield curve indicates that:
Interest rates are expected to rise in the future.
The top four categories of bond ratings are collectively known as __________.
Investment Grade Bonds
The present value of a bond's __________ determines the value of the bond.
Coupon Payment and Maturity Value
As market interest rates increase, the value of a bond will __________ all other things equal.
Decrease
A bond will sell at __________ if the required return is greater than the coupon rate.
Discount - If they buy at a discount, they will receive the coupon payments and also earn some return on the increase in value the bond will experience as it approaches maturity. If the bond is selling at a premium, the reverse will occur. The investor will still receive the coupon payment, but will now lose money on the bond's value as it moves toward maturity and par value.
Investors, analysts and managers often use the yield curve to:
Forecast Interest Rates
All other things equal, a corporation will pay a __________ coupon rate on __________ bonds.
higher, higher risk
The term structure of interest rates refers to the different:
interest rates of securities with the same risk but different maturity dates
