Question

1)Following a policy meeting on March​ 19, 2009, the Federal Reserve made an announcement that it would purchase up to​ $300 billion of​ longer-term Treasury securities over the following six months. What effect might this policy have on the yield​ curve?

A.The yield curve would steepen at the end and flatten somewhere along the rest of the curve.

B.The yield curve would jump with​ medium- and​ long-term rates and remain unchanged with​ short-term rates.

C.The yield curve would steadily shift​ up, with slightly more increase in​ short-term rates.

D.The yield curve would shift​ down, but mostly on​ medium- and​ long-term maturities.

2)

Using the information given the​ text, match the following descriptions of risk

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to the corresponding Standard and​ Poor's rating​ (i.e., AAA,​ AA, A,​ BBB, ...​ D).

Description	Rating
High grade high quality	AA C BBB B AAA AA

Highly speculative

BBB BBB C AAA AA D

Upper medium grade

A A BBB C AA AAA

Prime maximum safety

AAA AA C BBB B AAA

Speculative

Answer 1

1.

If the Federal Reserve purchases a significant amount of longer-term treasury debt, this will reduce the effective supply of treasuries of those particular maturities, resulting in a higher price and lower yield. This should have the effect of lowering the “long end” of the curve, decreasing medium and longer-term yields. In other words, the yield curve would shift down,but mostly on medium-and long-term maturities.

Correct Ans - D

2.

Investment Grade:

AAA - extremely strong capacity to meet its financial commitments.

AA - very strong capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree.

A -  strong capacity to meet its financial commitments but is somewhat prone to the adverse effects of changes in economic conditions

BBB - adequate capacity to meet its financial commitments. More prone to the adverse effects of changes in economic conditions

Non-Investment Grade (also known as speculative-grade)

B: currently has the capacity to meet its financial commitments. Adverse economic conditions will likely impair the obligor's capacity to meet its financial commitments.

C: highly vulnerable, perhaps in bankruptcy but still continuing to pay out on obligations

D: has defaulted on obligations and S&P believes that it will generally default on most or all obligations