Which of the following statements is CORRECT, other things held constant? O a. If expected inflation increases, interest rates are likely to increase. O b. Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt sec O c. If companies have fewer good investment opportunities, interest rates are likely to increase. O d. Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills. O e. If individuals increase their savings rate interest rater are likely to incroaco

Both EV-to-EBITDA and PE multiples can be linked to interest rates through the discount rate used in discounted cash flow valuation. Holding all else equal, when discount rates are higher, valuation ratios are lower. Perhaps because of this, we tend to see stock prices as well as, the value of private business transactions decline when interest rates increase. Macroeconomists like to describe interest rates as consisting of two components: the real interest rate component and an expected inflation component. In some situations, increases in interest rates are the result of an increasing real interest rate; in other situations, the cause of an interest rate increase is an increase in expected inflation. How might valuation ratios be expected to respond to an interest rate increase generated by an increase in expected inflation versus an interest rate increase that represents an increase in real interest rates?

“Inside the company fixed income managers bought bonds but they did not keep them for very long at all. Instead, they were constantly buying, exchanging and selling the bonds in their portfolios” Explain why the behavior described in the above quote may happen in terms of interest-rate risk immunization and downgrade risk. Do not discuss speculation or arbitrage as causes of this behavior as these will not gain any credit in this examination.

Corporate bonds are riskier than US Treasury, so they pay default risk premium over what Treasury pays to stay competitive in the market.  True  False

Which of the following events would make it less likely that a company would choose to call its outstanding callable bonds? O The company's financial situation improves significantly. O Ratings on the company's bonds are upgraded. O Inflation decreases significantly. Market interest rates decline sharply. O Market interest rates rise sharply.