Question 1

Which of the following statements about junk bonds is FALSE?

Accepted Answer

A)  Given the likelihood of default, it is never profitable to purchase junk bonds. 
B)  They pay higher interest rates than investment grade bonds due to higher perceived risk. 
C)  Prior to the 1970s, corporations were unable to issue junk bonds. 
D)  In October 2016, the average yield on junk bonds was more than twice the average yield on investment grade bonds. 
A)  Given the likelihood of default, it is never profitable to purchase junk bonds. 
B)  They pay higher interest rates than investment grade bonds due to higher perceived risk. 
C)  Prior to the 1970s, corporations were unable to issue junk bonds. 
D)  In October 2016, the average yield on junk bonds was more than twice the average yield on investment grade bonds.

Question 2

Which of the following is a single statistic that summarizes a rating agency's view of the issuer's likely ability to make the required payments on its bonds?

Accepted Answer

A)  grade 
B)  bond rating 
C)  speculation 
D)  yield 
A)  grade 
B)  bond rating 
C)  speculation 
D)  yield

Question 3

According to the liquidity premium theory,the yield curve normally has a positive slope because

Accepted Answer

A)  short-term interest rates are expected to rise. 
B)  term premiums rise as the time to maturity increases. 
C)  risk premiums rise over time. 
D)  long-term bonds are more liquid than short-term bonds. 
A)  short-term interest rates are expected to rise. 
B)  term premiums rise as the time to maturity increases. 
C)  risk premiums rise over time. 
D)  long-term bonds are more liquid than short-term bonds.

Question 4

For the average individual investor,the gap between the short-term interest rate at which he can borrow and the rate at which he could invest in long-term bonds is likely to be

Accepted Answer

A)  small or even negative, making the profitability of an interest -carry-trade strategy unlikely. 
B)  small or even negative, making the profitability of an interest -carry-trade strategy likely. 
C)  high, making the profitability of an interest -carry-trade strategy unlikely. 
D)  high, making the profitability of an interest -carry-trade strategy likely. 
A)  small or even negative, making the profitability of an interest -carry-trade strategy unlikely. 
B)  small or even negative, making the profitability of an interest -carry-trade strategy likely. 
C)  high, making the profitability of an interest -carry-trade strategy unlikely. 
D)  high, making the profitability of an interest -carry-trade strategy likely.

Question 5

Interest and capital gains are taxed differently in the United States in that

Accepted Answer

A)  interest is exempt from state and local taxes. 
B)  interest is taxed as ordinary income, but capital gains are taxed only when realized. 
C)  interest is taxed as ordinary income, but capital gains are taxed as accrued. 
D)  capital gains when realized are exempt from state and local taxes. 
A)  interest is exempt from state and local taxes. 
B)  interest is taxed as ordinary income, but capital gains are taxed only when realized. 
C)  interest is taxed as ordinary income, but capital gains are taxed as accrued. 
D)  capital gains when realized are exempt from state and local taxes.

Question 6

In which of the following periods was the yield curve inverted?

Accepted Answer

A)  February 2004 
B)  February 2007 
C)  February 2010 
D)  The yield curve was not inverted during any of these periods. 
A)  February 2004 
B)  February 2007 
C)  February 2010 
D)  The yield curve was not inverted during any of these periods.

Question 7

If a one-year bond currently yields 5% and is expected to yield 7% next year,the liquidity premium theory predicts that the yield today on a two-year bond should be

Accepted Answer

A)  5%. 
B)  less than 6%, but more than 5%. 
C)  6%. 
D)  more than 6%. 
A)  5%. 
B)  less than 6%, but more than 5%. 
C)  6%. 
D)  more than 6%.

Question 8

In which of the following situations would a lender definitely pay a borrower interest in return for borrowing the lender's money?

Accepted Answer

A)  if the real interest rate was negative 
B)  if the real interest rate was positive 
C)  if the nominal interest rate was negative 
D)  if the nominal interest rate was positive 
A)  if the real interest rate was negative 
B)  if the real interest rate was positive 
C)  if the nominal interest rate was negative 
D)  if the nominal interest rate was positive

Question 9

Which of the following statements about junk (high-risk)bonds is TRUE?

Accepted Answer

A)  They never outperform treasury bonds since they're too risky. 
B)  The price of junk bonds increases as their perceived risk increases. 
C)  They tend to perform best during recessions. 
D)  One can profit by owning them if market perceptions of their risk decline. 
A)  They never outperform treasury bonds since they're too risky. 
B)  The price of junk bonds increases as their perceived risk increases. 
C)  They tend to perform best during recessions. 
D)  One can profit by owning them if market perceptions of their risk decline.

Question 10

Under the liquidity premium theory,the expectation that future short-term rates will be constant results in a yield curve that

Accepted Answer

A)  is flat. 
B)  slopes upward. 
C)  slopes downward. 
D)  is flat, slopes upward, or slopes downward, depending on the size of the term premium at each maturity. 
A)  is flat. 
B)  slopes upward. 
C)  slopes downward. 
D)  is flat, slopes upward, or slopes downward, depending on the size of the term premium at each maturity.

Question 11

The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that

Accepted Answer

A)  yield curves usually slope upward. 
B)  yield curves usually slope downward. 
C)  instruments with different maturities are perfect substitutes. 
D)  savers are usually risk averse. 
A)  yield curves usually slope upward. 
B)  yield curves usually slope downward. 
C)  instruments with different maturities are perfect substitutes. 
D)  savers are usually risk averse.

Question 12

Which of the following bond ratings by Moody's Investors Service would NOT be considered to be below investment grade?

Accepted Answer

A)  Baa 
B)  Ba 
C)  B 
D)  All of these ratings are considered below investment grade. 
A)  Baa 
B)  Ba 
C)  B 
D)  All of these ratings are considered below investment grade.

Question 13

In late 2012,President Obama proposed raising the top income tax rate.All of the following are likely impacts of higher income tax rates on bonds EXCEPT

Accepted Answer

A)  higher interest rates on Treasury bonds. 
B)  lower interest rates on Municipal bonds. 
C)  increased demand for Municipal bonds. 
D)  lower prices for Municipal bonds. 
A)  higher interest rates on Treasury bonds. 
B)  lower interest rates on Municipal bonds. 
C)  increased demand for Municipal bonds. 
D)  lower prices for Municipal bonds.

Question 14

Which of the following is considered a default-risk-free instrument?

Accepted Answer

A)  a three-month commercial paper issued by GE 
B)  a share of stock issued by Google 
C)  a three-month Treasury bill 
D)  a ten-year bond issued by Intel 
A)  a three-month commercial paper issued by GE 
B)  a share of stock issued by Google 
C)  a three-month Treasury bill 
D)  a ten-year bond issued by Intel

Question 15

Under the liquidity premium theory,a flat yield curve indicates that investors expect future short-term rates to

Accepted Answer

A)  fall. 
B)  rise. 
C)  remain constant. 
D)  either fall or remain constant. 
A)  fall. 
B)  rise. 
C)  remain constant. 
D)  either fall or remain constant.

Question 16

What are the economic implications of an inverted yield curve?

Accepted Answer

An inverted yield curve normally precede

Question 17

Which theory explains all three facts about the term structure?

Accepted Answer

A)  expectations 
B)  segmented markets 
C)  preferential treatment 
D)  liquidity premium 
A)  expectations 
B)  segmented markets 
C)  preferential treatment 
D)  liquidity premium

Question 18

According to the expectations theory,what will be the interest rate on a three-year bond if a one-year bond has an interest rate of 2% and is expected to have an interest rate of 3% next year and 5% in two year? Report your answer using a percentage with two decimal places.

Accepted Answer

The interest rate on

Question 19

Financial instruments with high information costs

Accepted Answer

A)  will usually be more liquid than similar instruments with low information costs. 
B)  will have lower yields than U.S. Treasury securities. 
C)  may not be offered for sale in some states. 
D)  will have lower prices than similar instruments with low information costs. 
A)  will usually be more liquid than similar instruments with low information costs. 
B)  will have lower yields than U.S. Treasury securities. 
C)  may not be offered for sale in some states. 
D)  will have lower prices than similar instruments with low information costs.

Question 20

Currently,a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%.What is the risk premium of the typical A-rated ten-year corporate bond with a yield of 5.5%?

Accepted Answer

A)  0.5% 
B)  0.8% 
C)  1.17% 
D)  5.5% 
A)  0.5% 
B)  0.8% 
C)  1.17% 
D)  5.5%

Which of the following statements about junk bonds is FALSE?

Which of the following is a single statistic that summarizes a rating agency's view of the issuer's likely ability to make the required payments on its bonds?

According to the liquidity premium theory,the yield curve normally has a positive slope because

For the average individual investor,the gap between the short-term interest rate at which he can borrow and the rate at which he could invest in long-term bonds is likely to be

Interest and capital gains are taxed differently in the United States in that

In which of the following periods was the yield curve inverted?

If a one-year bond currently yields 5% and is expected to yield 7% next year,the liquidity premium theory predicts that the yield today on a two-year bond should be

In which of the following situations would a lender definitely pay a borrower interest in return for borrowing the lender's money?

Which of the following statements about junk (high-risk)bonds is TRUE?

Under the liquidity premium theory,the expectation that future short-term rates will be constant results in a yield curve that

The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that

Which of the following bond ratings by Moody's Investors Service would NOT be considered to be below investment grade?

In late 2012,President Obama proposed raising the top income tax rate.All of the following are likely impacts of higher income tax rates on bonds EXCEPT

Which of the following is considered a default-risk-free instrument?

Under the liquidity premium theory,a flat yield curve indicates that investors expect future short-term rates to

What are the economic implications of an inverted yield curve?

Which theory explains all three facts about the term structure?

According to the expectations theory,what will be the interest rate on a three-year bond if a one-year bond has an interest rate of 2% and is expected to have an interest rate of 3% next year and 5% in two year? Report your answer using a percentage with two decimal places.

Financial instruments with high information costs

Currently,a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%.What is the risk premium of the typical A-rated ten-year corporate bond with a yield of 5.5%?

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Stock Market, information, and Financial Market Efficiency

Derivatives and Derivative Markets

The Market for Foreign Exchange

Transactions Costs, asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Beyond Commercial Banks: Shadow Banks and Nonbank Financial Institutions

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I- the Aggregate Demand and Aggregate Supply Model

Monetary Theory Ii: the Is-Mp Model

Filters

Exam 5: The Risk Structure and Term Structure of Interest Rates

Which of the following statements about junk bonds is FALSE?

Which of the following is a single statistic that summarizes a rating agency's view of the issuer's likely ability to make the required payments on its bonds?

According to the liquidity premium theory,the yield curve normally has a positive slope because

For the average individual investor,the gap between the short-term interest rate at which he can borrow and the rate at which he could invest in long-term bonds is likely to be

Interest and capital gains are taxed differently in the United States in that

In which of the following periods was the yield curve inverted?

If a one-year bond currently yields 5% and is expected to yield 7% next year,the liquidity premium theory predicts that the yield today on a two-year bond should be

In which of the following situations would a lender definitely pay a borrower interest in return for borrowing the lender's money?

Which of the following statements about junk (high-risk)bonds is TRUE?

Under the liquidity premium theory,the expectation that future short-term rates will be constant results in a yield curve that

The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that

Which of the following bond ratings by Moody's Investors Service would NOT be considered to be below investment grade?

In late 2012,President Obama proposed raising the top income tax rate.All of the following are likely impacts of higher income tax rates on bonds EXCEPT

Which of the following is considered a default-risk-free instrument?

Under the liquidity premium theory,a flat yield curve indicates that investors expect future short-term rates to

What are the economic implications of an inverted yield curve?

Which theory explains all three facts about the term structure?

According to the expectations theory,what will be the interest rate on a three-year bond if a one-year bond has an interest rate of 2% and is expected to have an interest rate of 3% next year and 5% in two year? Report your answer using a percentage with two decimal places.

Financial instruments with high information costs

Currently,a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%.What is the risk premium of the typical A-rated ten-year corporate bond with a yield of 5.5%?

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Stock Market, information, and Financial Market Efficiency

Derivatives and Derivative Markets

The Market for Foreign Exchange

Transactions Costs, asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Beyond Commercial Banks: Shadow Banks and Nonbank Financial Institutions

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I- the Aggregate Demand and Aggregate Supply Model

Monetary Theory Ii: the Is-Mp Model

Filters