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Financial Market Tutorial 2

The document discusses factors that influence bond interest rates, how recessions affect corporate bond risk premiums, differences between bond pricing theories, and features of efficient markets. It asks questions about bond interest rates under expectations theory and with liquidity premiums.

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Sylvia Gyn
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40 views1 page

Financial Market Tutorial 2

The document discusses factors that influence bond interest rates, how recessions affect corporate bond risk premiums, differences between bond pricing theories, and features of efficient markets. It asks questions about bond interest rates under expectations theory and with liquidity premiums.

Uploaded by

Sylvia Gyn
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Financial Market Tutorial 2

1. Identify and describe the factors that influence interest rates on bonds.

2. How would a severe recession affect the risk premium on corporate bonds?

3. Briefly discuss the differences between expectations theory, market segmentation theory
and liquidity premium theory.

4. Which should have the higher risk premium on its interest rates, a corporate bond with a
Moody’s Baa rating or a corporate bond with a C rating? Give reason.

5. The one-year interest rate over the next 10 years will be 3%, 4.5%, 6%, 7.5%, 9%, 10.5%,
13%, 14.5%, 16%, and 17.5%.
a) Using the expectations theory, what will be the interest rates on a three-year bond, six-year
bond, and nine-year bond?
b) Assume that investors prefer holding short-term bonds. Then, 10% liquidity premium is
required for each year of a bond’ maturity. What will be the interest rates on a three-year
bond, six-year bond, and nine-year bond?

6. Briefly explain the features of efficient markets.

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