What is the base interest rate?
The sum of the real interest rate and the expected rate of inflation.
What is the relationship between credit risk and the risk premium?
Suppose that the one-year spot rate is 4.1% and the two-year spot rate is 4.6%. What is the one-year forward rate one year from now?
Comment on the following: “There is no theory of the term structure of interest rates that would explain a yield curve in which interest rates increase with maturity for the first two years, decline with maturity until year 5, and then increase with maturity after year 5.”
Why are “biased” expectation theories of the term structure of interest rates biased?
A corporate treasurer is considering borrowing funds for 10 years. How can the corporate treasurer use forward rates in determining whether to borrow today or postpone borrowing?
Consider the following yields to maturity:
Why can forward rates be viewed as hedgeable rates?
Comment on the following statement: “Forward rates are good predictors of future interest rates.”
Complete the following table:
2. Suppose the yield on a 10-year corporate bond is 6.2% and the yield on a similar-maturity Treasury security is 4.5%. a. What is the yield spread for this corporate bond? b. Why is there a yield spread between these two securities?