Workshop 3 again

Question 1

Can debt and equity both be long term financial instruments?

Answer 1

Yes

Question 2

Term structure of an interest rate

Answer 2

Relationship among interest rates on bonds with different maturities

Question 3

If long term interest rates are above short term interest rates. What does yield curve look like

Answer 3

Steeply upward sloping

Question 4

1st fact of yield curve

Answer 4

yield on bonds of different maturities move together over time.

Question 5

2nd fact of yield curve

Answer 5

When short term IR are low, yield curves are more likely to have an upward slope. When short term IR are high, yield curves are more likely to slope downwards.

Question 6

3rd facts of yield curves

Answer 6

Yield curve is most commonly upward sloping

Question 7

Expectations thoery explains which facts

Answer 7

1 and 2

Question 8

Segmented market theory explains which facts

Answer 8

just 3

Question 9

Liquidity premium theory explains which facts

Answer 9

all 3

Question 10

According to liquidity premium theory, what does a flat yield curve mean

Answer 10

short term interest rates are expected to fall moderately.

Question 11

What affect does an increase in default risk on corporate bonds have?

Answer 11

Lowers demand for these bonds, increases the demand for default free bonds

Question 12

If a corporation’s earnings rise, then what happens to the default risk and IR

Answer 12

Default risk will decrease, price of bonds will go up and the IR will decrease