Chapter 6: Q. 20 (page 189)
If expectations of future short-term interest rates suddenly fell, what would happen to the slope of the yield curve?
Interest rates for short-term loans are projected to reduce in the future. As a result, the yield curve will have a downward slope.
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Which should have the higher risk premium on its interest rates, a corporate bond with a Moody’s Baa rating or a corporate bond with a C rating? Why?
In 2010 and 2011, the government of Greece risked defaulting on its debt due to a severe budget crisis. Using bond market graphs, compare the effects on the risk premium between U.S. Treasury debt and comparable-maturity Greek debt.
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.
Just before the collapse of the subprime mortgage market in , the most important credit-rating agencies rated mortgage-backed securities with Aaa and AAA ratings. Explain how it was possible that a few months into 2008, the same securities had the lowest possible ratings. Should we always trust credit-rating agencies?
Suppose the interest rates on one-, five-, and ten-year U.S. Treasury bonds are currently and respectively. Investor A chooses to hold only one-year bonds, and Investor B is indifferent with regard to holding five- and ten-year bonds. How can you explain the behavior of Investors A and B?
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