Characteristics that affect security yield
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Characteristics That Affect Security Yields
Identify the relevant characteristics of any security that can affect the security's yield.
Impact of Liquidity on Yield
What effect does a high credit risk have on securities?
Tax Effects on Yields
Do investors in high tax brackets or those in low tax brackets benefit more from tax-exempt securities? Why? Do municipal bonds or corporate bonds offer a higher before tax yield at a given point in time? 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?
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.
Liquidity Premium Theory
Explain the liquidity premium theory.
Segmented Markets Theory
If a downward-sloping 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?
Yield Curve
What factors influence the shape of the yield curve? Describe how financial market participants use the yield curve.
Yield Curve
If liquidity and interest rate expectations are both important for explaining the shape of a yield curve, what does a flat yield curve indicate about the market's perception of future interest rates?
Global Interaction among Yield Curves
Assume that the yield curves in the United States, France, and Japan are flat. If the U.S. yield curve then suddenly becomes positively sloped, do you think the yield curves in France and Japan would be affected? If so, how?
After-Tax Yield
You need to choose between investing in a one-year municipal bond with a 7 percent yield and a one-year corporate bond with an 11 percent yield. If your marginal federal income tax rate is 30 percent and no other differences exist between these two securities, which one would you invest in?
The Fed
Briefly describe the origin of the Federal Reserve System. Describe the functions of the Fed district banks.
FOMC
What are the main goals of the Federal Open Market Committee (FOMC)? How does it attempt to achieve these goals?
Open Market Operations
Explain how the Fed increases the money supply through open market operations.
Effect on Money Supply
Why do the Fed's open market operations have a different effect on the money supply than transactions between two depository institutions?
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Characteristics That Affect Security Yields
Identify the relevant characteristics of any security that can affect the security's yield.
There are several characteristics of a security that can affect the yield: The default risk, the liquidity of the security, the tax status of the company/security, the maturity of the security, and any special provisions or futures associated with the security.
Impact of Liquidity on Yield
What effect does a high credit risk have on securities?
Generally speaking, the higher the credit risk, the higher the premium required. The high credit risk can be associated with high default rates so to attempt to minimize the risk involved, higher premiums are charged.
Tax Effects on Yields
Do investors in high tax brackets or those in low tax brackets benefit more from tax-exempt securities? Why? Do municipal bonds or corporate bonds offer a higher before tax yield at a given point in time? 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?
Investors concerned with lowering their tax bracket, the focus is sometimes place on tax-exempt securities. The tax-exempt securities offer situations where the tax savings from tax-exempt is greater than the tax savings of higher end investments. Even though higher tax bracket investors have generally more avenues of lowering taxable income, they still benefit more from the tax exempt securities.
Corporate bonds offer a higher tax yield than municipal bonds mostly because of the taxation of each bond. Corporate bonds are only subject to federal taxation, while municipal bonds are subjected to federal taxation and any additional taxes that have been levied by cities or counties. However, municipal bonds may have a higher net tax yield for those investors that are similar to the aforementioned high tax bracket investor. For an investor in a low tax bracket, the corporate bonds would most often offer the higher after tax yields simply because the lower tax bracket investor pays lower taxes based on the bracket they are in.
While this situation will never happen, if taxes did not exist then a Treasury bond yield would be lower than a municipal bond simply because Treasury bonds are assumed to be risk-free. However one could speculate that if ...
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