Exam 6: The Risk and Term Structure of Interest Rates

-When short-term interest rates are expected to fall sharply in the future,the yield curve will

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

If the expected path of 1-year interest rates over the next four years is 5 percent,4 percent,2 percent,and 1 percent,then the expectations theory predicts that today's interest rate on the four-year bond is

Other things being equal,a decrease in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the ________.

Corporate bonds are not as liquid as government bonds because

-A ________ yield curve predicts a future increase in inflation.

A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium.

When yield curves are flat,

According to the expectations theory of the term structure

The ________ of the term structure states the following: the interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of the long-term bond plus a term premium that responds to supply and demand conditions for that bond.

According to this theory of the term structure,bonds of different maturities are not substitutes for one another.

The expectations theory and the segmented markets theory do not explain the facts very well,but they provide the groundwork for the most widely accepted theory of the term structure of interest rates,

Bonds with no default risk are called

The Bush tax cut reduced the top income tax bracket from 39% to 35% over a ten-year period.Supply and demand analysis predicts the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds.

An increase in the liquidity of corporate bonds,other things being equal,shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________.

The term structure of interest rates is

If the expected path of 1-year interest rates over the next five years is 1 percent,2 percent,3 percent,4 percent,and 5 percent,the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of

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

When the Treasury bond market becomes less liquid,other things equal,the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.

If the yield curve has a mild upward slope,the liquidity premium theory (assuming a mild preference for shorter-term bonds)indicates that the market is predicting