Select any TWO (2) of the following questions to answer. As you develop your essay, remember to include not only text materials but also contemporary materials as well. These can come from various sources and can reflect domestic and/or global concerns.
1. Distinguish between the systematic and the nonsystematic portions of the total risk of an asset. Explain why risk averters holding a risky security should receive an expected return above the risk free rate that is in proportion only to systematic risk of that security rather than to its total risk.
2. “The more risk averse a person is, the more likely that person is to diversify”. Is this statement true, false, or uncertain. Explain.
3. “If bonds of different maturities are close substitutes, their interest rates are more likely to move together.” Is this statement true, false, or uncertain? Explain.
4. What is a yield curve and how is it drawn? What determines the shape of yield curves? Briefly discuss how the segmented markets theory, the expectations theory, and the liquidity premium theory explain the shape of the yield curve. What should be the shape of the yield curve according to each theory?
5. If the yield curve suddenly becomes steeper, how would you revise your predictions of interest rates in the future?
6. What effect would reducing income tax rates have on the interest rates of municipal bonds? Would interest rates of Treasury securities be affected? If so, how?
7. What is the difference between the Federal Government’s debt and its deficit? Which of these has to be financed by the Treasury? Is the debt/deficit growing?
8. Since municipal bonds are lesser quality than US government bonds they should have a higher rate of return than US government bonds in order to induce investors to hold them. How then can you explain why this is generally not the case. Why do municipals have a much wider bid-asked spread than government securities?
9. Define the following Alternative Investments: Futures, Options, FOREX and Gold. These investment vehicles saw increased popularity during the period 2003 to 2008, prior to the Sub-Prime and Credit crises. How have these crises affected investment activity in these vehicles post 2008?
10. Monetary expectations seem to affect the price of stocks and bonds. Explain how the expectations are formed? Show how they can be used to predict the future of stocks and bonds under various rates of inflation.
