Finance Test 2 Part 3

What is the Real Risk-Free Rate? It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people’s time preferences for consumption.
What is the Liquidity Risk Premium? This is the premium added as a compensation for the risk that an investor will not get paid in full.
What is Liquidity Risk Premium? It is based on the bond’s marketability and trading frequency; the less frequently the security is traded, the higher the premium added, thus increasing the interest rate.
What is Nominal Risk-Free Rate? It is calculated by adding the inflation premium to r*
What is the Inflation Premium? Over the past several years, Germany, Japan, and Switzerland have had lower interest rates than the United Sates due to lower values of this premium.
What is the Maturity Risk Premium? As interest rates rise, bond prices fall. Because interest rate changes are uncertain, the premium is added as a compensation for this uncertainty.
What is the order of Treasury scores? AAA, AA, A, BBB
If the treasury yield curve is downward sloping… Then inflation is expected to decrease and yield curves of highly liquid assets will be lower than yield curves of relatively liquid assets. Yield curve for an AA-rated corporate bond is expected to be above the U.S. Treasury bond yield curve.
One-Year-Forward Rate (1+1-Year Rate)(1+1-Year Rate in 1 Year)=(1+2-Year Rate)^2
What can cause Impact Yield and Cost of Borrowing money increase and become more expensive? If a credit rating was downgraded from AA to BBB and a company uses debt to buy another company. (A leveraged buyout)
Ended after Interest Rates .

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