Question 1

The risk structure of interest rates is

Accepted Answer

A) the structure of how interest rates move over time. 
B) the relationship among interest rates of different bonds with the same maturity. 
C) the relationship among the term to maturity of different bonds. 
D) the relationship among interest rates on bonds with different maturities. 
A) the structure of how interest rates move over time. 
B) the relationship among interest rates of different bonds with the same maturity. 
C) the relationship among the term to maturity of different bonds. 
D) the relationship among interest rates on bonds with different maturities.

Question 2

An increase 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) reduce; reduce 
C) increase; reduce 
D) reduce; increase 
A) increase; increase 
B) reduce; reduce 
C) increase; reduce 
D) reduce; increase

Question 3

If you have a very low tolerance for risk,which of the following bonds would you be least likely to hold in your portfolio?

Accepted Answer

A) a U.S.Treasury bond 
B) a municipal bond 
C) a corporate bond with a rating of Aaa 
D) a corporate bond with a rating of Baa 
A) a U.S.Treasury bond 
B) a municipal bond 
C) a corporate bond with a rating of Aaa 
D) a corporate bond with a rating of Baa

Question 4

Which of the following statements are true?

Accepted Answer

A) An increase in tax rates will increase the demand for Treasury bonds,lowering their interest rates. 
B) Because the tax-exempt status of municipal bonds was of little benefit to bond holders when tax rates were low,they had higher interest rates than U.S.government bonds before World War II. 
C) Interest rates on municipal bonds will be higher than comparable bonds without the tax exemption. 
D) Because coupon payments on municipal bonds are exempt from federal income tax,the expected after-tax return on them will be higher for individuals in lower income tax brackets. 
A) An increase in tax rates will increase the demand for Treasury bonds,lowering their interest rates. 
B) Because the tax-exempt status of municipal bonds was of little benefit to bond holders when tax rates were low,they had higher interest rates than U.S.government bonds before World War II. 
C) Interest rates on municipal bonds will be higher than comparable bonds without the tax exemption. 
D) Because coupon payments on municipal bonds are exempt from federal income tax,the expected after-tax return on them will be higher for individuals in lower income tax brackets.

Question 5

When yield curves are downward sloping,

Accepted Answer

A) long-term interest rates are above short-term interest rates. 
B) short-term interest rates are above long-term interest rates. 
C) short-term interest rates are about the same as long-term interest rates. 
D) medium-term interest rates are above both short-term and long-term interest rates. 
A) long-term interest rates are above short-term interest rates. 
B) short-term interest rates are above long-term interest rates. 
C) short-term interest rates are about the same as long-term interest rates. 
D) medium-term interest rates are above both short-term and long-term interest rates.

Question 6

If 1-year interest rates for the next three years are expected to be 4,2,and 3 percent,and the 3-year term premium is 1 percent,than the 3-year bond rate will be

Accepted Answer

A) 1 percent. 
B) 2 percent. 
C) 3 percent. 
D) 4 percent. 
A) 1 percent. 
B) 2 percent. 
C) 3 percent. 
D) 4 percent.

Question 7

Which of the following statements are true?

Accepted Answer

A) A decrease in default risk on corporate bonds lowers the demand for these bonds,but increases the demand for default-free bonds. 
B) The expected return on corporate bonds decreases as default risk increases. 
C) A corporate bond's return becomes less uncertain as default risk increases. 
D) As their relative riskiness increases,the expected return on corporate bonds increases relative to the expected return on default-free bonds. 
A) A decrease in default risk on corporate bonds lowers the demand for these bonds,but increases the demand for default-free bonds. 
B) The expected return on corporate bonds decreases as default risk increases. 
C) A corporate bond's return becomes less uncertain as default risk increases. 
D) As their relative riskiness increases,the expected return on corporate bonds increases relative to the expected return on default-free bonds.

Question 8

A plot of the interest rates on default-free government bonds with different terms to maturity is called

Accepted Answer

A) a risk-structure curve. 
B) a default-free curve. 
C) a yield curve. 
D) an interest-rate curve. 
A) a risk-structure curve. 
B) a default-free curve. 
C) a yield curve. 
D) an interest-rate curve.

Question 9

A(n)________ in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds,all else equal.

Accepted Answer

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

Question 10

In actual practice,short-term interest rates and long-term interest rates usually move together; this is the major shortcoming of the

Accepted Answer

A) segmented markets theory. 
B) expectations theory. 
C) liquidity premium theory. 
D) separable markets theory. 
A) segmented markets theory. 
B) expectations theory. 
C) liquidity premium theory. 
D) separable markets theory.

Question 11

-If a higher inflation is expected,what would you expect to happen to the shape of the yield curve? Why?

Accepted Answer

The yield curve should have a steep upwa

Question 12

During the Great Depression years 1930-1933 there was a very high rate of business failures and defaults,we would expect the risk premium for ________ bonds to be very high.

Accepted Answer

A) U.S.Treasury 
B) corporate Aaa 
C) municipal 
D) corporate Baa 
A) U.S.Treasury 
B) corporate Aaa 
C) municipal 
D) corporate Baa

Question 13

-When the yield curve is flat or downward-sloping,it suggest that the economy is more likely to enter

Accepted Answer

A) a recession. 
B) an expansion. 
C) a boom time. 
D) a period of increasing output. 
A) a recession. 
B) an expansion. 
C) a boom time. 
D) a period of increasing output.

Question 14

If the possibility of a default increases because corporations begin to suffer losses,then the default risk on corporate bonds will ________,and the bonds' returns will become ________ uncertain,meaning that the expected return on these bonds will decrease,everything else held constant.

Accepted Answer

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

Question 15

Which of the following securities has the lowest interest rate?

Accepted Answer

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

Question 16

During a "flight to quality"

Accepted Answer

A) the spread between Treasury bonds and Baa bonds increases. 
B) the spread between Treasury bonds and Baa bonds decreases. 
C) the spread between Treasury bonds and Baa bonds is not affected. 
D) the change in the spread between Treasury bonds and Baa bonds cannot be predicted. 
A) the spread between Treasury bonds and Baa bonds increases. 
B) the spread between Treasury bonds and Baa bonds decreases. 
C) the spread between Treasury bonds and Baa bonds is not affected. 
D) the change in the spread between Treasury bonds and Baa bonds cannot be predicted.

Question 17

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

Accepted Answer

A) increase; increase 
B) reduce; reduce 
C) reduce; increase 
D) increase; reduce 
A) increase; increase 
B) reduce; reduce 
C) reduce; increase 
D) increase; reduce

Question 18

According to the segmented markets theory of the term structure

Accepted Answer

A) bonds of one maturity are close substitutes for bonds of other maturities,therefore,interest rates on bonds of different maturities move together over time. 
B) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. 
C) investors' strong preferences for short-term relative to long-term bonds explains why yield curves typically slope downward. 
D) because of the positive term premium,the yield curve will not be observed to be downward-sloping. 
A) bonds of one maturity are close substitutes for bonds of other maturities,therefore,interest rates on bonds of different maturities move together over time. 
B) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. 
C) investors' strong preferences for short-term relative to long-term bonds explains why yield curves typically slope downward. 
D) because of the positive term premium,the yield curve will not be observed to be downward-sloping.

Question 19

U.S.government bonds have no default risk because

Accepted Answer

A) they are backed by the full faith and credit of the federal government. 
B) the federal government can increase taxes to pay its obligations. 
C) they are backed with gold reserves. 
D) they can be exchanged for silver at any time. 
A) they are backed by the full faith and credit of the federal government. 
B) the federal government can increase taxes to pay its obligations. 
C) they are backed with gold reserves. 
D) they can be exchanged for silver at any time.

Question 20

Everything else held constant,a decrease in marginal tax rates would likely have the effect of ________ the demand for municipal bonds,and ________ the demand for U.S.government bonds.

Accepted Answer

A) increasing; increasing 
B) increasing; decreasing 
C) decreasing; increasing 
D) decreasing; decreasing 
A) increasing; increasing 
B) increasing; decreasing 
C) decreasing; increasing 
D) decreasing; decreasing

Exam 6: The Risk and Term Structure of Interest Rates

The risk structure of interest rates is

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

If you have a very low tolerance for risk,which of the following bonds would you be least likely to hold in your portfolio?

Which of the following statements are true?

When yield curves are downward sloping,

If 1-year interest rates for the next three years are expected to be 4,2,and 3 percent,and the 3-year term premium is 1 percent,than the 3-year bond rate will be

Which of the following statements are true?

A plot of the interest rates on default-free government bonds with different terms to maturity is called

A(n)________ in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds,all else equal.

In actual practice,short-term interest rates and long-term interest rates usually move together; this is the major shortcoming of the

-If a higher inflation is expected,what would you expect to happen to the shape of the yield curve? Why?

During the Great Depression years 1930-1933 there was a very high rate of business failures and defaults,we would expect the risk premium for ________ bonds to be very high.

-When the yield curve is flat or downward-sloping,it suggest that the economy is more likely to enter

If the possibility of a default increases because corporations begin to suffer losses,then the default risk on corporate bonds will ________,and the bonds' returns will become ________ uncertain,meaning that the expected return on these bonds will decrease,everything else held constant.

Which of the following securities has the lowest interest rate?

During a "flight to quality"

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

According to the segmented markets theory of the term structure

U.S.government bonds have no default risk because

Everything else held constant,a decrease in marginal tax rates would likely have the effect of ________ the demand for municipal bonds,and ________ the demand for U.S.government bonds.

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

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

A(n) in the liquidity of corporate bonds will the price of corporate bonds and the yield on corporate bonds,all else equal.

If the possibility of a default increases because corporations begin to suffer losses,then the default risk on corporate bonds will ,and the bonds' returns will become uncertain,meaning that the expected return on these bonds will decrease,everything else held constant.

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

Everything else held constant,a decrease in marginal tax rates would likely have the effect of the demand for municipal bonds,and the demand for U.S.government bonds.