Chapter 6: Q. 19 (page 189)
If the yield curve suddenly became steeper, how would you revise your predictions of interest rates in the future?
A decrease in the expected future interest rate implies a decrease in the slope of the yield curve.
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Assuming the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to four years, and plot the resulting yield curves for the following paths of one-year interest rates over the next four years:
a. 4%, 6%, 11%, 15%
b. 3%, 5%, 13%, 15%
How would your yield curves change if people preferred shorter-term bonds to longer-term bonds?
If yield curves, on average, were flat, what would this say about the liquidity (term) premiums in the term structure? Would you be more or less willing to accept the expectations theory?
If junk bonds are “junk,” then why do investors buy them?
If bond investors decide that -year bonds are no longer as desirable an investment as they were previously, predict what will happen to the yield curve, assuming (a) the expectations theory of the term structure holds, and (b) the segmented markets theory of the term structure holds.
Prior to , mortgage lenders required a house inspection to assess a home’s value and often used the same one or two inspection companies in the same geographical market. Following the collapse of the housing market in , mortgage lenders required a house inspection, but this inspection was arranged through a third party. How does the pre- scenario illustrate a conflict of interest similar to the role that credit-rating agencies played in the global financial crisis?
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