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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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What is a key function of credit-rating agencies? Do credit-rating agencies always provide reliable information? What was the role of credit-rating agencies in the sub-prime crisis of ?
The amount of additional interest investors receive due to various risk premiums changes over time. Sometimes risk premiums are much larger than at other times. For example, the default risk premium was very small in the late 1990s when the economy was so healthy that business failures were rare. This risk premium increases during recessions
Go to http://www.federalreserve.gov/releases/h15 (historical data), and find the following three interest rate listings for AAA- and Baa-rated bonds: the most current listing; the listing for January 5, 2018; and the listings for June 1, 2008, and June 1, 2007. Prepare a http://www.federalreserve.gov/Releases/h15/update/ The Federal Reserve reports the yields on different-maturity U.S. Treasury bonds. graph that shows the interest rate information for these bonds over these three time periods (see Figure 1 for an example). Are the risk premiums stable, or do they change over time?
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?
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?
During 2008, the difference in yield (the yield spread) between three-month AA-rated financial commercial paper and three-month AA-rated nonfinancial commercial paper steadily increased from its usual level of close to zero, spiking to over a full percentage point at its peak in October 2008. What explains this sudden increase?
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