Question 1

The two best known bond rating services are:

Accepted Answer

A)  the Federal Reserve and Moody's Investment Services. 
B)  the Federal Reserve and the U.S. Treasury. 
C)  Standard & Poor's and the Wall Street Journal. 
D)  Standard & Poor's and Moody's Investment Services. 
A)  the Federal Reserve and Moody's Investment Services. 
B)  the Federal Reserve and the U.S. Treasury. 
C)  Standard & Poor's and the Wall Street Journal. 
D)  Standard & Poor's and Moody's Investment Services.

Question 2

Suppose the economy has an inverted yield curve. According to the expectations hypothesis, which of the following interpretations could be used to explain this?

Accepted Answer

A)  Interest rates are expected to fall in the future 
B)  Investors prefer bonds with less default risk. 
C)  Investors prefer bonds with less interest-rate risk. 
D)  The term spread is positive. 
A)  Interest rates are expected to fall in the future 
B)  Investors prefer bonds with less default risk. 
C)  Investors prefer bonds with less interest-rate risk. 
D)  The term spread is positive.

Question 3

During a recession you would expect the difference between the commercial paper rate and the yield on U.S. T-bills of the same maturity to:

Accepted Answer

A)  be the same since their maturities are the same. 
B)  increase reflecting the possibility of higher default risk for commercial paper. 
C)  decrease. 
D)  fluctuate rarely. 
A)  be the same since their maturities are the same. 
B)  increase reflecting the possibility of higher default risk for commercial paper. 
C)  decrease. 
D)  fluctuate rarely.

Question 4

Why do economists pay particular attention to inverted yield curves?

Accepted Answer

Inverted yield curves can be h

Question 5

Why can't the expectations hypothesis stand alone as an adequate theory to explain yield curves?

Accepted Answer

The expectations hypothesis does a good

Question 6

Explain why an inverted yield curve is a valuable forecasting tool?

Accepted Answer

An inverted yield curve is a valuable fo

Question 7

Under the liquidity premium theory, if investors expect short-term interest rates to remain constant, the yield curve should:

Accepted Answer

A)  have a positive slope. 
B)  have a negative slope. 
C)  be flat. 
D)  have an increasing slope. 
A)  have a positive slope. 
B)  have a negative slope. 
C)  be flat. 
D)  have an increasing slope.

Question 8

Commercial paper refers to:

Accepted Answer

A)  the financial publications read by the CEO's of public corporations. 
B)  any debt security with a maturity exceeding one year. 
C)  short-term collateralized securities issued only by corporations. 
D)  unsecured short-term debt issued by corporations and governments. 
A)  the financial publications read by the CEO's of public corporations. 
B)  any debt security with a maturity exceeding one year. 
C)  short-term collateralized securities issued only by corporations. 
D)  unsecured short-term debt issued by corporations and governments.

Question 9

The economy enters a period of robust economic growth that is expected to last for several years. How would this be reflected in the risk structure of interest rates?

Accepted Answer

A)  An inverted yield curve 
B)  A decrease in the term spread 
C)  A decrease in the interest rate spread 
D)  An increase in yields on tax-exempt bonds 
A)  An inverted yield curve 
B)  A decrease in the term spread 
C)  A decrease in the interest rate spread 
D)  An increase in yields on tax-exempt bonds

Question 10

What is the main purpose (function) of bond rating services?

Accepted Answer

These companies monitor the st

Question 11

The default-risk premium:

Accepted Answer

A)  should vary directly with the bond's yield and inversely with its price. 
B)  is less than 0 (zero) for a U.S. Treasury bond. 
C)  should be lower for a highly speculative bond than for an investment-grade bond. 
D)  should vary directly with the bond's yield and the bond's price. 
A)  should vary directly with the bond's yield and inversely with its price. 
B)  is less than 0 (zero) for a U.S. Treasury bond. 
C)  should be lower for a highly speculative bond than for an investment-grade bond. 
D)  should vary directly with the bond's yield and the bond's price.

Question 12

The risk spread on bonds fluctuates mainly because:

Accepted Answer

A)  taxes tend to increase over time. 
B)  bond rating agencies are often inconsistent. 
C)  new information about a borrower's financial condition becomes available. 
D)  people do not change their attitudes towards risk quickly. 
A)  taxes tend to increase over time. 
B)  bond rating agencies are often inconsistent. 
C)  new information about a borrower's financial condition becomes available. 
D)  people do not change their attitudes towards risk quickly.

Question 13

The default-risk premium:

Accepted Answer

A)  is negative for a U.S. Treasury bond. 
B)  is also known as the risk spread. 
C)  must always be greater than 0 (zero). 
D)  is assigned by a bond-rating agency. 
A)  is negative for a U.S. Treasury bond. 
B)  is also known as the risk spread. 
C)  must always be greater than 0 (zero). 
D)  is assigned by a bond-rating agency.

Question 14

Does the expectations hypothesis allow for people to have a preference for longer-term investments? Explain

Accepted Answer

Not really, a key assumption of the expe

Question 15

In 2003, ratings agencies downgraded bonds issued by the State of California several times. How will this affect the market for these bonds?

Accepted Answer

A)  Yields on these bonds will decrease and the yield on Treasury bonds will increase. 
B)  The yield on these bonds will not change, nor will the yield on Treasury bonds. 
C)  The yield on these bonds and on Treasury bonds will both decrease. 
D)  Yields on these bonds will increase. 
A)  Yields on these bonds will decrease and the yield on Treasury bonds will increase. 
B)  The yield on these bonds will not change, nor will the yield on Treasury bonds. 
C)  The yield on these bonds and on Treasury bonds will both decrease. 
D)  Yields on these bonds will increase.

Question 16

The risk spread:

Accepted Answer

A)  is also known as the default-risk premium. 
B)  should have a direct relationship with the bond's price. 
C)  should have an inverse relationship with the bond's yield. 
D)  is always constant. 
A)  is also known as the default-risk premium. 
B)  should have a direct relationship with the bond's price. 
C)  should have an inverse relationship with the bond's yield. 
D)  is always constant.

Question 17

Explain why many mayors of cities facing the need to borrow for infrastructure improvements, may not look favorably on a large federal income tax rate reduction?

Accepted Answer

The interest earned on municipal bonds i

Question 18

The expectations hypothesis suggests the:

Accepted Answer

A)  yield curve should usually be downward sloping. 
B)  yield curve should usually be upward sloping. 
C)  slope of the yield curve reflects the risk premium associated with longer-term bonds. 
D)  slope of the yield curve depends on the expectations for future short-term rates. 
A)  yield curve should usually be downward sloping. 
B)  yield curve should usually be upward sloping. 
C)  slope of the yield curve reflects the risk premium associated with longer-term bonds. 
D)  slope of the yield curve depends on the expectations for future short-term rates.

Question 19

Which of the following is not typically used for qualifying mortgages as prime or subprime?

Accepted Answer

A)  The borrower's income 
B)  The borrower's credit score 
C)  The borrower's ethnicity 
D)  The loan to value ratio 
A)  The borrower's income 
B)  The borrower's credit score 
C)  The borrower's ethnicity 
D)  The loan to value ratio

Question 20

According to the expectations hypothesis, if investors believed that, for a given holding period, the average of the expected future short-term yields was greater than the long-term yield for the holding period, they would act so as to drive:

Accepted Answer

A)  down the price of the short-term bond and drive up the price of the long-term bond. 
B)  up the price of the short-term bond and drive down the price of the long-term bond. 
C)  up the prices of both the short- and long-term bonds. 
D)  down the prices of both the short- and long-term bonds. 
A)  down the price of the short-term bond and drive up the price of the long-term bond. 
B)  up the price of the short-term bond and drive down the price of the long-term bond. 
C)  up the prices of both the short- and long-term bonds. 
D)  down the prices of both the short- and long-term bonds.

Exam 7: The Risk and Term Structure of Interest Rates

The two best known bond rating services are:

Suppose the economy has an inverted yield curve. According to the expectations hypothesis, which of the following interpretations could be used to explain this?

During a recession you would expect the difference between the commercial paper rate and the yield on U.S. T-bills of the same maturity to:

Why do economists pay particular attention to inverted yield curves?

Why can't the expectations hypothesis stand alone as an adequate theory to explain yield curves?

Explain why an inverted yield curve is a valuable forecasting tool?

Under the liquidity premium theory, if investors expect short-term interest rates to remain constant, the yield curve should:

Commercial paper refers to:

The economy enters a period of robust economic growth that is expected to last for several years. How would this be reflected in the risk structure of interest rates?

What is the main purpose (function) of bond rating services?

The default-risk premium:

The risk spread on bonds fluctuates mainly because:

The default-risk premium:

Does the expectations hypothesis allow for people to have a preference for longer-term investments? Explain

In 2003, ratings agencies downgraded bonds issued by the State of California several times. How will this affect the market for these bonds?

The risk spread:

Explain why many mayors of cities facing the need to borrow for infrastructure improvements, may not look favorably on a large federal income tax rate reduction?

The expectations hypothesis suggests the:

Which of the following is not typically used for qualifying mortgages as prime or subprime?

According to the expectations hypothesis, if investors believed that, for a given holding period, the average of the expected future short-term yields was greater than the long-term yield for the holding period, they would act so as to drive:

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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