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9 Cards in this Set

  • Front
  • Back
default
occurs when the issuer of the bond is unable or unwilling ot make interest payments when promised or pay off the face value when hte bond matures
a bond with a default risk will always have a _ risk premium and an _ in its default risk will raise the risk premium
positive, increase
credit rating agencies
investment advisory firms that rate the quality of corporate and municipal bonds in terms of the probability of default
junk bonds
bonds with ratings below Baa have higher default risk and are called junk bonds
yield curve
a plot of the yields on bonds with differeing terms to maturity but the same risk, liquidity, and tax considerations
expectations theory
the interest rate on a long-term bond will equal an average of the short-term interest rates that people expect to occur over the life of the long-term bond.
segmented markets theory
sees markets for different-maturity bonds as completely separate and segmented
liquidity premium theory
the interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of hte long-term bond plus a liquidity premium that responds to supply and demand conditions for that bond.
preferred habitat theory
takes a somewhat less direct approach to modifying hte expectations hypothesis but comes to a similar conclusion. Assumes that investors have a preference for bonds of one maturity over another, a particular bond maturity in which they prefer to invest.