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Over the last 18 months, the Fed raised short term interest rates from 4.5 % to 6% in an effort to defeat inflationary pressures in the economy. The  long term T-bond yields only shifted upward from 5.5% to about 6%. Why were long term bonds less sensitive to the Fed's fight against inflation? Explain briedly.

28.TIPS are

A)securities formed from the coupon payments only of government bonds.

B)securities formed from the principal payments only of government bonds.

C)government bonds with par value linked to the general level of prices.

D)government bonds with coupon rate linked to the general level of prices.

E)zero-coupon government bonds.

29.When a bond indenture includes a sinking fund provision

A)firms must establish a cash fund for future bond redemption.

B)bondholders always benefit, because principal repayment on the scheduled maturity date is guaranteed.

C)bondholders may lose because their bonds can be repurchased by thecorporation at below-market prices.

D)both a and b are true.

E)none of the above are true.

30.Subordination clauses in bond indentures

A)restrict the amount of additional borrowing the firm can undertake.

B)are sometimes referred to as "me-first" rules.

C)provide higher priority to senior creditors in the event of bankruptcy.

D)all of the above are true.

E)both b and c are true.

31.The term structure of interest rates is:

A)The relationship between the rates of interest on all securities.

B)The relationship between the interest rate on a security and its time to maturity.

C)The relationship between the yield on a bond and its default rate.

D)All of the above.

E)None of the above.

32.The yield curve shows at any point in time:

A)The relationship between the yield on a bond and the duration of the bond.

B)the relationship between the coupon rate on a bond and time to maturity of the bond.

C)The relationship between yield on a bond and the time to maturity on the bond.

D)All of the above.

E)None of the above.

33.An inverted yield curve implies that:

A)Long-term interest rates are lower than short-term interest rates.

B)Long-term interest rates are higher than short-term interest rates.

C)Long-term interest rates are the same as short-term interest rates.

D)Intermediate term interest rates are higher than either short- or long-term interest rates.

E)none of the above.

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