1. Characteristics That Affect Security Yields Identify

the relevant characteristics of any security that

can affect its yield.

2. Impact of Credit Risk on Yield How does high

credit risk affect the yield offered securities?

3. Impact of Liquidity on Yield Discuss the relationship

between the yield and the liquidity of securities.

4. Tax Effects on Yields Do investors in high tax

brackets or those in low tax brackets benefit more

from tax-exempt securities? Why? At a given point in

time, which offers a higher before-tax yield: municipal

bonds or corporate bonds? Why? Which has the

higher after-tax yield? If taxes did not exist, would

Treasury bonds offer a higher or lower yield than

municipal bonds with the same maturity? Why?

5. Pure Expectations Theory Explain how a yield

curve would shift in response to a sudden expectation

of rising interest rates, according to the pure expectations

theory.

6. Forward Rate What is the meaning of the forward

rate in the context of the term structure of interest

rates? Why might forward rates consistently overestimate

future interest rates? How could such a bias be

avoided?

7. Pure Expectations Theory Assume an expectation

of lower interest rates in the future arises quite

suddenly. What would be the effect on the shape of the

yield curve? Explain.

8. Liquidity Premium Theory Explain the liquidity

premium theory.

9. Impact of Liquidity Premium on Forward Rate

Explain how consideration of a liquidity premium

affects the estimate of a forward interest rate.

10. Segmented Markets Theory If a downwardsloping

yield curve is mainly attributed to segmented

markets theory, what does that suggest about the

demand for and supply of funds in the short-term and

long-term maturity markets?

11. Segmented Markets Theory If the segmented

markets theory causes an upward-sloping yield curve,

what does this imply? If markets are not completely

segmented, should we dismiss the segmented markets

theory as even a partial explanation for the term

structure of interest rates? Explain.

12. Preferred Habitat Theory Explain the preferred

habitat theory.

13. Yield Curve Which factors influence the shape

of the yield curve? Describe how financial market participants

use the yield curve.