(1) Read the risk structure section of chapter 6 and explain the following two concepts:...
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Accounting
(1) Read the risk structure section of chapter 6 and explain the following two concepts: Default Risk and Risk Premium.
(2) Graphically show why the risk premium increases during financial crises. Explain in details.
2. (Tax Treatment) Graphically show why municipal bonds are usually with a lower interest rate than federal government bond. Explain in details.
3. What is the formula for the expectation hypothesis. The one-year interest rate is 4% in 2019. The two year interest rate is 5% 2019 and the three-year interest rate is 6% in 2019. According to the expectation hypothesis, what is your expectation of one-year interest rate in 2020 and 2021 respectively? Explain your calculation.
4. Assuming the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five years, and plot the resulting yield curves for the following paths of one-year interest rates over the next five years: 5%, 6%, 7%, 6% and 5%.
5. What are the three facts that the term structure theory attempts to explain? What is the formula for the liquidity premium theory? Explain how does the liquidity premium theory explain the three facts associated with the term structure?
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