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9 Cards in this Set
- Front
- Back
default
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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
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a bond with a default risk will always have a _ risk premium and an _ in its default risk will raise the risk premium
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positive, increase
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credit rating agencies
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investment advisory firms that rate the quality of corporate and municipal bonds in terms of the probability of default
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junk bonds
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bonds with ratings below Baa have higher default risk and are called junk bonds
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yield curve
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a plot of the yields on bonds with differeing terms to maturity but the same risk, liquidity, and tax considerations
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expectations theory
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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.
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segmented markets theory
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sees markets for different-maturity bonds as completely separate and segmented
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liquidity premium theory
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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.
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preferred habitat theory
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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.
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