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Chapter 6: Q.3 (page 187)

Do you think that a U.S. Treasury bill will have a risk premium that is higher than, lower than, or the same as that of a similar security (in terms of maturity and liquidity) issued by the government of Colombia?

Short Answer

Expert verified

The price of Treasury Bills will fluctuate often due to currency changes.

Step by step solution

01

To determine

The risk premium on the US Treasury Bill will be higher, lower, or the same as identical security issued by the government of CCountry.

02

Explanation

Because the value of the currency in the US is greater than the currency in the C Country, the risk premium on a US Treasury Bill will be larger than the risk premium on aCinvestment. The price of Treasury Bills will vary often due to currency fluctuations.

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Most popular questions from this chapter

The table below shows current and expected future one-year interest rates, as well as current interest rates on multi-year bonds. Use the table to calculate the liquidity premium for each multiyear bond.

If junk bonds are 鈥渏unk,鈥� then why do investors buy them?

Go to the St. Louis Federal Reserve FRED database, and find daily yield data on the following U.S. treasuries securities: one-month (DGS1MO), three-month (DGS3MO), six-month (DGS6MO), one-year (DGS1), two-year (DGS2), three-year (DGS3), five-year (DGS5), seven-year (DGS7), 10-year (DGS10), 20-year (DGS20), and 30-year (DGS30). Download the last full year of data available into a spreadsheet.

a. Construct a yield curve by creating a line graph for the most recent day of data available, and for the same day (or as close to the same day as possible) one year prior, across all the maturities. How do the yield curves compare? What does the changing slope say about potential changes in economic conditions?

b. Determine the date of the most recent Federal Open Market Committee policy statement. Construct yield curves for both the day before the policy statement was released and the day on which the policy statement was released. Was there any significant change in the yield curve as a result of the policy statement? How might this be explained?

If a yield curve looks like the one shown in the figure below, what is the market predicting about the movement of future short-term interest rates? What might the yield curve indicate about the market鈥檚 predictions for the inflation rate in the future?

Which should have the higher risk premium on its interest rates, a corporate bond with a Moody鈥檚 Baa rating or a corporate bond with a C rating? Why?
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