Question 1

-An inverted yield curve predicts that short-term interest rates

Accepted Answer

A) are expected to rise in the future. 
B) will rise and then fall in the future. 
C) will remain unchanged in the future. 
D) will fall in the future. 
A) are expected to rise in the future. 
B) will rise and then fall in the future. 
C) will remain unchanged in the future. 
D) will fall in the future. D

Question 2

The collapse of the subprime mortgage market

Accepted Answer

A) did not affect the corporate bond market. 
B) increased the perceived riskiness of Treasury securities. 
C) reduced the Baa-Aaa spread. 
D) increased the Baa-Aaa spread. 
A) did not affect the corporate bond market. 
B) increased the perceived riskiness of Treasury securities. 
C) reduced the Baa-Aaa spread. 
D) increased the Baa-Aaa spread. D

Question 3

Three factors explain the risk structure of interest rates:

Accepted Answer

A) liquidity,default risk,and the income tax treatment of a security. 
B) maturity,default risk,and the income tax treatment of a security. 
C) maturity,liquidity,and the income tax treatment of a security. 
D) maturity,default risk,and the liquidity of a security. 
A) liquidity,default risk,and the income tax treatment of a security. 
B) maturity,default risk,and the income tax treatment of a security. 
C) maturity,liquidity,and the income tax treatment of a security. 
D) maturity,default risk,and the liquidity of a security. A

Question 4

A decrease in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield of Treasury bonds,everything else held constant.

Accepted Answer

A) increase; increase 
B) decrease; decrease 
C) increase; decrease 
D) decrease; increase 
A) increase; increase 
B) decrease; decrease 
C) increase; decrease 
D) decrease; increase

Question 5

The spread between the interest rates on bonds with default risk and default-free bonds is called the

Accepted Answer

A) risk premium. 
B) junk margin. 
C) bond margin. 
D) default premium. 
A) risk premium. 
B) junk margin. 
C) bond margin. 
D) default premium.

Question 6

-The mound-shaped yield curve in the figure above indicates that the inflation rate is expected to

Accepted Answer

A) remain constant in the near-term and fall later on. 
B) fall moderately in the near-term and rise later on. 
C) rise moderately in the near-term and fall later on. 
D) remain unchanged in the near-term and rise later on. 
A) remain constant in the near-term and fall later on. 
B) fall moderately in the near-term and rise later on. 
C) rise moderately in the near-term and fall later on. 
D) remain unchanged in the near-term and rise later on.

Question 7

Which of the following bonds would have the highest default risk?

Accepted Answer

A) Municipal bonds 
B) Investment-grade bonds 
C) U.S.Treasury bonds 
D) Junk bonds 
A) Municipal bonds 
B) Investment-grade bonds 
C) U.S.Treasury bonds 
D) Junk bonds

Question 8

Differences in ________ explain why interest rates on Treasury securities are not all the same.

Accepted Answer

A) risk 
B) liquidity 
C) time to maturity 
D) tax characteristics 
A) risk 
B) liquidity 
C) time to maturity 
D) tax characteristics

Question 9

A decrease in default risk on corporate bonds ________ the demand for these bonds,and ________ the demand for default-free bonds,everything else held constant.

Accepted Answer

A) increases; lowers 
B) lowers; increases 
C) does not change; greatly increases 
D) moderately lowers; does not change 
A) increases; lowers 
B) lowers; increases 
C) does not change; greatly increases 
D) moderately lowers; does not change

Question 10

According to the liquidity premium theory of the term structure,a slightly upward sloping yield curve indicates that short-term interest rates are expected to

Accepted Answer

A) rise in the future. 
B) remain unchanged in the future. 
C) decline moderately in the future. 
D) decline sharply in the future. 
A) rise in the future. 
B) remain unchanged in the future. 
C) decline moderately in the future. 
D) decline sharply in the future.

Question 11

A decrease in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities,everything else held constant.

Accepted Answer

A) increase; increase 
B) decrease; decrease 
C) increase; decrease 
D) decrease; increase 
A) increase; increase 
B) decrease; decrease 
C) increase; decrease 
D) decrease; increase

Question 12

-The U-shaped yield curve in the figure above indicates that short-term interest rates are expected to

Accepted Answer

A) rise in the near-term and fall later on. 
B) fall sharply in the near-term and rise later on. 
C) fall moderately in the near-term and rise later on. 
D) remain unchanged in the near-term and rise later on. 
A) rise in the near-term and fall later on. 
B) fall sharply in the near-term and rise later on. 
C) fall moderately in the near-term and rise later on. 
D) remain unchanged in the near-term and rise later on.

Question 13

Economists' attempts to explain the term structure of interest rates

Accepted Answer

A) illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence. 
B) illustrate how economists continue to accept theories that fail to explain observed behavior of interest rate movements. 
C) prove that the real world is a special case that tends to get short shrift in theoretical models. 
D) have proved entirely unsatisfactory to date. 
A) illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence. 
B) illustrate how economists continue to accept theories that fail to explain observed behavior of interest rate movements. 
C) prove that the real world is a special case that tends to get short shrift in theoretical models. 
D) have proved entirely unsatisfactory to date.

Question 14

Everything else held constant,if the tax-exempt status of municipal bonds were eliminated,then

Accepted Answer

A) the interest rates on municipal bonds would still be less than the interest rate on Treasury bonds. 
B) the interest rate on municipal bonds would equal the rate on Treasury bonds. 
C) the interest rate on municipal bonds would exceed the rate on Treasury bonds. 
D) the interest rates on municipal,Treasury,and corporate bonds would all increase. 
A) the interest rates on municipal bonds would still be less than the interest rate on Treasury bonds. 
B) the interest rate on municipal bonds would equal the rate on Treasury bonds. 
C) the interest rate on municipal bonds would exceed the rate on Treasury bonds. 
D) the interest rates on municipal,Treasury,and corporate bonds would all increase.

Question 15

According to the liquidity premium theory,a yield curve that is flat means that

Accepted Answer

A) bond purchasers expect interest rates to rise in the future. 
B) bond purchasers expect interest rates to stay the same. 
C) bond purchasers expect interest rates to fall in the future. 
D) the yield curve has nothing to do with expectations of bond purchasers. 
A) bond purchasers expect interest rates to rise in the future. 
B) bond purchasers expect interest rates to stay the same. 
C) bond purchasers expect interest rates to fall in the future. 
D) the yield curve has nothing to do with expectations of bond purchasers.

Question 16

As default risk decreases,the expected return on corporate bonds ________,and the return becomes ________ uncertain,everything else held constant.

Accepted Answer

A) increases; less 
B) increases; more 
C) decreases; less 
D) decreases; more 
A) increases; less 
B) increases; more 
C) decreases; less 
D) decreases; more

Question 17

Bonds with relatively high risk of default are called

Accepted Answer

A) Brady bonds. 
B) junk bonds. 
C) zero coupon bonds. 
D) investment grade bonds. 
A) Brady bonds. 
B) junk bonds. 
C) zero coupon bonds. 
D) investment grade bonds.

Question 18

-The steeply upward sloping yield curve in the figure above indicates that

Accepted Answer

A) short-term interest rates are expected to rise in the future. 
B) short-term interest rates are expected to fall moderately in the future. 
C) short-term interest rates are expected to fall sharply in the future. 
D) short-term interest rates are expected to remain unchanged in the future. 
A) short-term interest rates are expected to rise in the future. 
B) short-term interest rates are expected to fall moderately in the future. 
C) short-term interest rates are expected to fall sharply in the future. 
D) short-term interest rates are expected to remain unchanged in the future.

Question 19

According to the segmented markets theory of the term structure

Accepted Answer

A) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds. 
B) buyers of bonds do not prefer bonds of one maturity over another. 
C) interest rates on bonds of different maturities do not move together over time. 
D) buyers require an additional incentive to hold long-term bonds. 
A) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds. 
B) buyers of bonds do not prefer bonds of one maturity over another. 
C) interest rates on bonds of different maturities do not move together over time. 
D) buyers require an additional incentive to hold long-term bonds.

Question 20

According to the liquidity premium theory of the term structure

Accepted Answer

A) bonds of different maturities are not substitutes. 
B) if yield curves are downward sloping,then short-term interest rates are expected to fall by so much that,even when the positive term premium is added,long-term rates fall below short-term rates. 
C) yield curves should never slope downward. 
D) interest rates on bonds of different maturities do not move together over time. 
A) bonds of different maturities are not substitutes. 
B) if yield curves are downward sloping,then short-term interest rates are expected to fall by so much that,even when the positive term premium is added,long-term rates fall below short-term rates. 
C) yield curves should never slope downward. 
D) interest rates on bonds of different maturities do not move together over time.

Exam 6: The Risk and Term Structure of Interest Rates

-An inverted yield curve predicts that short-term interest rates

The collapse of the subprime mortgage market

Three factors explain the risk structure of interest rates:

A decrease in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield of Treasury bonds,everything else held constant.

The spread between the interest rates on bonds with default risk and default-free bonds is called the

-The mound-shaped yield curve in the figure above indicates that the inflation rate is expected to

Which of the following bonds would have the highest default risk?

Differences in ________ explain why interest rates on Treasury securities are not all the same.

A decrease in default risk on corporate bonds ________ the demand for these bonds,and ________ the demand for default-free bonds,everything else held constant.

According to the liquidity premium theory of the term structure,a slightly upward sloping yield curve indicates that short-term interest rates are expected to

A decrease in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities,everything else held constant.

-The U-shaped yield curve in the figure above indicates that short-term interest rates are expected to

Economists' attempts to explain the term structure of interest rates

Everything else held constant,if the tax-exempt status of municipal bonds were eliminated,then

According to the liquidity premium theory,a yield curve that is flat means that

As default risk decreases,the expected return on corporate bonds ________,and the return becomes ________ uncertain,everything else held constant.

Bonds with relatively high risk of default are called

-The steeply upward sloping yield curve in the figure above indicates that

According to the segmented markets theory of the term structure

According to the liquidity premium theory of the term structure

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behavior of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Central Banks and the Federal Reserve System

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory,inflation and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

The ISLM Model

Filters

A decrease in the liquidity of corporate bonds will the price of corporate bonds and the yield of Treasury bonds,everything else held constant.

A decrease in default risk on corporate bonds the demand for these bonds,and the demand for default-free bonds,everything else held constant.

A decrease in the riskiness of corporate bonds will the yield on corporate bonds and the yield on Treasury securities,everything else held constant.

As default risk decreases,the expected return on corporate bonds ,and the return becomes uncertain,everything else held constant.