Question 1

Which of the following statements is not true of the yield curve for U.S. Treasury securities?

Accepted Answer

A)  The yield curve usually slopes upward. 
B)  The yield curve usually is inverted. 
C)  The yield curve shows the relationship among securities of different maturities. 
D)  The yield curve can shift over time. 
A)  The yield curve usually slopes upward. 
B)  The yield curve usually is inverted. 
C)  The yield curve shows the relationship among securities of different maturities. 
D)  The yield curve can shift over time.

Question 2

If an investor wants to compare commercial paper to a corresponding default-free investment, which security would he/she use and why?

Accepted Answer

He or she should use the U.S. Treasury b

Question 3

Which of the following would be most likely to earn an AAA rating from Standard & Poor's?

Accepted Answer

A)  A 10-year bond issued by Canada 
B)  A bond issue by a new vegetarian fast-food chain 
C)  A 10-year bond issued by a state or municipality 
D)  Shares of stock in Coca-Cola 
A)  A 10-year bond issued by Canada 
B)  A bond issue by a new vegetarian fast-food chain 
C)  A 10-year bond issued by a state or municipality 
D)  Shares of stock in Coca-Cola

Question 4

What is the highest bond rating assigned by Standard and Poor's?

Accepted Answer

A)  AA 
B)  EEE 
C)  AAA 
D)  A 
A)  AA 
B)  EEE 
C)  AAA 
D)  A

Question 5

A flight to quality refers to a move by investors:

Accepted Answer

A)  away from bonds towards stocks. 
B)  towards securities of other countries and away from U.S. Treasuries. 
C)  towards precious metals and away from U.S. Treasury bonds. 
D)  away from low-quality bonds towards high-quality bonds. 
A)  away from bonds towards stocks. 
B)  towards securities of other countries and away from U.S. Treasuries. 
C)  towards precious metals and away from U.S. Treasury bonds. 
D)  away from low-quality bonds towards high-quality bonds.

Question 6

Holding liquidity and default risk constant, an investor earning 6% from a tax-exempt bond who is in a 25% tax bracket would be indifferent between that bond and a taxable bond with a(n):

Accepted Answer

A)  8% yield. 
B)  4.5% yield. 
C)  6.25% yield. 
D)  7.5% yield. 
A)  8% yield. 
B)  4.5% yield. 
C)  6.25% yield. 
D)  7.5% yield.

Question 7

If the federal government replaced the current income tax with a national sales tax, the price of:

Accepted Answer

A)  corporate bonds and municipal bonds would rise. 
B)  municipal bonds would rise and corporate bonds would not change. 
C)  corporate bonds would fall while the price of municipal bonds would rise. 
D)  municipal bonds would fall while the price of corporate bonds would rise. 
A)  corporate bonds and municipal bonds would rise. 
B)  municipal bonds would rise and corporate bonds would not change. 
C)  corporate bonds would fall while the price of municipal bonds would rise. 
D)  municipal bonds would fall while the price of corporate bonds would rise.

Question 8

An investor in a 30% marginal tax bracket, earning $10 in interest annually for a $100 U.S. Treasury bond:

Accepted Answer

A)  earns a 10% after-tax return because interest on U.S. Treasury bonds is tax exempt at the federal level. 
B)  earns a 3% return after-tax. 
C)  would be indifferent between this bond and a municipal bond offering $7 annually per $100 of face value, assuming the same default risk and liquidity characteristics. 
D)  earns a 1% return after-tax. 
A)  earns a 10% after-tax return because interest on U.S. Treasury bonds is tax exempt at the federal level. 
B)  earns a 3% return after-tax. 
C)  would be indifferent between this bond and a municipal bond offering $7 annually per $100 of face value, assuming the same default risk and liquidity characteristics. 
D)  earns a 1% return after-tax.

Question 9

When the Russian government defaulted on its bonds in August 1998:

Accepted Answer

A)  risk spreads decreased significantly. 
B)  yields on U.S. Treasury securities fell while yields on corporate bonds rose. 
C)  yields on U.S. Treasury securities rose while prices of corporate bonds rose. 
D)  risk spreads did not change. 
A)  risk spreads decreased significantly. 
B)  yields on U.S. Treasury securities fell while yields on corporate bonds rose. 
C)  yields on U.S. Treasury securities rose while prices of corporate bonds rose. 
D)  risk spreads did not change.

Question 10

The bond rating of a security reflects the:

Accepted Answer

A)  size of the coupon payment relative to the face value. 
B)  likelihood the lender/borrower will be repaid by the borrower/issuer. 
C)  return a holder is likely to receive. 
D)  size of the coupon rate relative to other interest rates. 
A)  size of the coupon payment relative to the face value. 
B)  likelihood the lender/borrower will be repaid by the borrower/issuer. 
C)  return a holder is likely to receive. 
D)  size of the coupon rate relative to other interest rates.

Question 11

The interest-rate risk that is associated with bond investing:

Accepted Answer

A)  exists even if an investor plans on holding the bond to maturity. 
B)  arises because of a mismatch between the investor's investment horizon and the maturity of the bond. 
C)  is not reflected in the risk premium. 
D)  can be eliminated by holding only consols. 
A)  exists even if an investor plans on holding the bond to maturity. 
B)  arises because of a mismatch between the investor's investment horizon and the maturity of the bond. 
C)  is not reflected in the risk premium. 
D)  can be eliminated by holding only consols.

Question 12

Any theory of the term structure of interest rates needs to explain each of the following, except why:

Accepted Answer

A)  short-term yields are more volatile than long-term yields. 
B)  the yields of different maturities tend to move together. 
C)  short-term yields are usually higher than long-term yields. 
D)  long-term yields are usually higher than short-term yields. 
A)  short-term yields are more volatile than long-term yields. 
B)  the yields of different maturities tend to move together. 
C)  short-term yields are usually higher than long-term yields. 
D)  long-term yields are usually higher than short-term yields.

Question 13

Assume the expectations hypothesis regarding the term structure of interest rates is correct. If the current one-year interest rate is 3% and the one-year-ahead expected one-year interest rate is 5%, then the current two-year interest rate should be:

Accepted Answer

A)  3%. 
B)  5%. 
C)  4%. 
D)  8%. 
A)  3%. 
B)  5%. 
C)  4%. 
D)  8%.

Question 14

At the beginning of 2006 the yield curve was usually flat, and sometimes downward sloping (inverted). This raised concerns that a recession might be on the way. But the slope of the yield curve is only part of the story. What else is important?

Accepted Answer

A recession is associated both with an i

Question 15

Bonds with the same tax status and ratings:

Accepted Answer

A)  always have the same yield. 
B)  can have different yields due to different maturities. 
C)  should sell for the same price. 
D)  will still have different yields depending on their face values. 
A)  always have the same yield. 
B)  can have different yields due to different maturities. 
C)  should sell for the same price. 
D)  will still have different yields depending on their face values.

Question 16

All of the following are true about the risk spread except it should:

Accepted Answer

A)  be higher for highly speculative bonds than investment grade bonds. 
B)  have a direct relationship with the bond's yield. 
C)  have an inverse relationship with the bond's price. 
D)  have a direct relationship with the bond's price. 
A)  be higher for highly speculative bonds than investment grade bonds. 
B)  have a direct relationship with the bond's yield. 
C)  have an inverse relationship with the bond's price. 
D)  have a direct relationship with the bond's price.

Question 17

If the Federal Reserve surprises investors by announcing an easing of monetary policy:

Accepted Answer

A)  it should have no impact on the slope of the yield curve. 
B)  we should expect the yield curve to possibly become inverted. 
C)  the yield curve would flatten. 
D)  we should expect the yield curve to steepen. 
A)  it should have no impact on the slope of the yield curve. 
B)  we should expect the yield curve to possibly become inverted. 
C)  the yield curve would flatten. 
D)  we should expect the yield curve to steepen.

Question 18

A permanent increase of borrowing by the U.S. Treasury to finance growing budget deficits will:

Accepted Answer

A)  result in U.S. Treasury yields being higher than high-grade corporate bonds. 
B)  result in the price of U.S. Treasury bonds rising. 
C)  cause the yield on U.S. Treasury bonds to increase, but still be lower than corporate bonds. 
D)  result in lower yields on corporate bonds. 
A)  result in U.S. Treasury yields being higher than high-grade corporate bonds. 
B)  result in the price of U.S. Treasury bonds rising. 
C)  cause the yield on U.S. Treasury bonds to increase, but still be lower than corporate bonds. 
D)  result in lower yields on corporate bonds.

Question 19

Investors usually obtain bond ratings from:

Accepted Answer

A)  private bond-rating agencies. 
B)  the annual tax returns of the issuer. 
C)  the U.S. government from publicly available information. 
D)  public Information made available by the bond issuers. 
A)  private bond-rating agencies. 
B)  the annual tax returns of the issuer. 
C)  the U.S. government from publicly available information. 
D)  public Information made available by the bond issuers.

Question 20

The risk structure of interest rates says:

Accepted Answer

A)  the interest rates on a variety of bonds will move independently of each other. 
B)  lower rated bonds will have higher yields. 
C)  U.S. Treasury bond yields always change by more than other bonds. 
D)  interest rates only compensate for risk during recessions. 
A)  the interest rates on a variety of bonds will move independently of each other. 
B)  lower rated bonds will have higher yields. 
C)  U.S. Treasury bond yields always change by more than other bonds. 
D)  interest rates only compensate for risk during recessions.

Exam 7: The Risk and Term Structure of Interest Rates

Which of the following statements is not true of the yield curve for U.S. Treasury securities?

If an investor wants to compare commercial paper to a corresponding default-free investment, which security would he/she use and why?

Which of the following would be most likely to earn an AAA rating from Standard & Poor's?

What is the highest bond rating assigned by Standard and Poor's?

A flight to quality refers to a move by investors:

Holding liquidity and default risk constant, an investor earning 6% from a tax-exempt bond who is in a 25% tax bracket would be indifferent between that bond and a taxable bond with a(n):

If the federal government replaced the current income tax with a national sales tax, the price of:

An investor in a 30% marginal tax bracket, earning $10 in interest annually for a $100 U.S. Treasury bond:

When the Russian government defaulted on its bonds in August 1998:

The bond rating of a security reflects the:

The interest-rate risk that is associated with bond investing:

Any theory of the term structure of interest rates needs to explain each of the following, except why:

Assume the expectations hypothesis regarding the term structure of interest rates is correct. If the current one-year interest rate is 3% and the one-year-ahead expected one-year interest rate is 5%, then the current two-year interest rate should be:

At the beginning of 2006 the yield curve was usually flat, and sometimes downward sloping (inverted). This raised concerns that a recession might be on the way. But the slope of the yield curve is only part of the story. What else is important?

Bonds with the same tax status and ratings:

All of the following are true about the risk spread except it should:

If the Federal Reserve surprises investors by announcing an easing of monetary policy:

A permanent increase of borrowing by the U.S. Treasury to finance growing budget deficits will:

Investors usually obtain bond ratings from:

The risk structure of interest rates says:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

Stocks, Stock Markets and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange Rate Policy and the Central Bank

Money Growth, Money Demand and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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