Question 1

How do ratings agencies earn income?

Accepted Answer

They primarily earn

Question 2

Steve Forbes has run for president twice on a program of a "flat tax." Under a flat tax,there would be only one tax bracket for the federal income tax and most tax deductions and tax exemptions would be eliminated.Suppose that Forbes wins the 2020 presidential election.What would be the likely impact on the market for municipal bonds?

Accepted Answer

If interest on municipal bonds were no l

Question 3

Which criterion is NOT useful when evaluating a theory?

Accepted Answer

A)  It has predictive power. 
B)  It fits one's pre-conceived bias. 
C)  It offers a model consistent with investor behavior. 
D)  It explains actual data well. 
A)  It has predictive power. 
B)  It fits one's pre-conceived bias. 
C)  It offers a model consistent with investor behavior. 
D)  It explains actual data well.

Question 4

Discuss what happened to the market prices on corporate securities relative to government securities during the Great Recession.

Accepted Answer

The Great Recession was accompanied by a

Question 5

Which of the following accurately describes the tax treatment of municipal bonds?

Accepted Answer

A)  All income from municipal bonds is tax free. 
B)  Interest is tax free, but unrealized capital gains are taxable. 
C)  Interest is tax free, but realized capital gains are taxable. 
D)  Interest is taxable, but capital gains are tax free. 
A)  All income from municipal bonds is tax free. 
B)  Interest is tax free, but unrealized capital gains are taxable. 
C)  Interest is tax free, but realized capital gains are taxable. 
D)  Interest is taxable, but capital gains are tax free.

Question 6

Municipal bonds are issued

Accepted Answer

A)  only by local governments. 
B)  only by state governments. 
C)  by both state and local governments. 
D)  by the federal government, and by state and local governments. 
A)  only by local governments. 
B)  only by state governments. 
C)  by both state and local governments. 
D)  by the federal government, and by state and local governments.

Question 7

The term structure is usually defined with yields on which securities?

Accepted Answer

A)  corporate bonds 
B)  commercial paper 
C)  U.S. Treasury securities 
D)  municipal bonds 
A)  corporate bonds 
B)  commercial paper 
C)  U.S. Treasury securities 
D)  municipal bonds

Question 8

Describe the facts found in the bond market about the relationship between interest rates on bonds of different maturities.

Accepted Answer

Typically,long-term interest r

Question 9

Under the expectations theory,if market participants expect that future short-term rates will be higher than current short-term rates,the yield curve will

Accepted Answer

A)  slope upward. 
B)  slope downward. 
C)  be flat. 
D)  slope upward, slope downward, or be flat, depending on risk, liquidity, cost of information, and tax considerations. 
A)  slope upward. 
B)  slope downward. 
C)  be flat. 
D)  slope upward, slope downward, or be flat, depending on risk, liquidity, cost of information, and tax considerations.

Question 10

Table 5.1
 $$\begin{array} { | c | c | r | } 
\hline 1 \text { year } & 2 \text { years } & 3 \text { years } \
\hline 1.50 \% & 2.25 \% & 3.25 \% \
\hline
\end{array}$$ 
Table 5.1 shows the interest rates for Treasury securities of different maturities. Assume that the liquidity premium theory is correct.
-Refer to Table 5.1 On this day,what did investors expect the interest rate to be on the one-year Treasury bill in two years if the term premium on a two-year Treasury note is 0.25%?

Accepted Answer

A)  1.875% 
B)  2.25% 
C)  2.375% 
D)  2.5% 
A)  1.875% 
B)  2.25% 
C)  2.375% 
D)  2.5%

Question 11

The expectations theory suggests that

Accepted Answer

A)  the yield curve should usually be upward-sloping. 
B)  the yield curve should usually be downward-sloping. 
C)  the slope of the yield curve depends on the expected future path of short-term rates. 
D)  the slope of the yield curve reflects the risk premium incorporated into the yields on long-term bonds. 
A)  the yield curve should usually be upward-sloping. 
B)  the yield curve should usually be downward-sloping. 
C)  the slope of the yield curve depends on the expected future path of short-term rates. 
D)  the slope of the yield curve reflects the risk premium incorporated into the yields on long-term bonds.

Question 12

The default risk premium is

Accepted Answer

A)  relevant only for securities issued by very small companies. 
B)  the additional yield a saver requires for holding a bond with some default risk. 
C)  zero for corporate bonds, but quite substantial for corporate stock. 
D)  constant across the business cycle. 
A)  relevant only for securities issued by very small companies. 
B)  the additional yield a saver requires for holding a bond with some default risk. 
C)  zero for corporate bonds, but quite substantial for corporate stock. 
D)  constant across the business cycle.

Question 13

According to the liquidity premium theory,if market participants expect that inflation in the future will be lower than it currently is,the yield curve will

Accepted Answer

A)  slope upward. 
B)  be flat. 
C)  be inverted. 
D)  be vertical. 
A)  slope upward. 
B)  be flat. 
C)  be inverted. 
D)  be vertical.

Question 14

Following the downgrade of U.S.debt by Standard & Poor's in 2011

Accepted Answer

A)  other rating agencies also downgraded U.S. debt. 
B)  interest rates spiked as investor's perception of risk increased. 
C)  investors didn't seem to be any more concerned about default risk than before the downgrade. 
D)  the U.S. implemented a plan to significantly reduce its budget deficit later that year. 
A)  other rating agencies also downgraded U.S. debt. 
B)  interest rates spiked as investor's perception of risk increased. 
C)  investors didn't seem to be any more concerned about default risk than before the downgrade. 
D)  the U.S. implemented a plan to significantly reduce its budget deficit later that year.

Question 15

Situations of negative interest rates on short-term bonds resulted from

Accepted Answer

A)  high income tax rates. 
B)  government regulations requiring financial firms to purchase government bonds. 
C)  very low risk premiums. 
D)  investors looking for safe havens when other investments were perceived to be very risky. 
A)  high income tax rates. 
B)  government regulations requiring financial firms to purchase government bonds. 
C)  very low risk premiums. 
D)  investors looking for safe havens when other investments were perceived to be very risky.

Question 16

Unlike the segmented markets theory,the expectations theory attributes the slope of the yield curve to

Accepted Answer

A)  tax considerations. 
B)  the fact that short-term bonds are not perfect substitutes for long-term bonds. 
C)  the market's view of future short-term interest rates. 
D)  the variance in the inflation rates over the business cycle. 
A)  tax considerations. 
B)  the fact that short-term bonds are not perfect substitutes for long-term bonds. 
C)  the market's view of future short-term interest rates. 
D)  the variance in the inflation rates over the business cycle.

Question 17

Suppose that your marginal federal income tax rate is 30%,the sum of your marginal state and local tax rates is 5%,and the yield on thirty-year U.S.Treasury bonds is 10%.You would be indifferent between buying a thirty-year Treasury bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity,risk,and costs of information)if the municipal bond has a yield of

Accepted Answer

A)  6.5%. 
B)  7.0%. 
C)  9.5%. 
D)  10.0%. 
A)  6.5%. 
B)  7.0%. 
C)  9.5%. 
D)  10.0%.

Question 18

Which of the following statements is TRUE?

Accepted Answer

A)  The more liquid the bond, the lower the yield. 
B)  Tax-free bonds normally have a higher interest rate than other types of bonds. 
C)  The price of a bond increases as it becomes more risky. 
D)  The yield curve illustrates the relative default risks of alternative types of bonds. 
A)  The more liquid the bond, the lower the yield. 
B)  Tax-free bonds normally have a higher interest rate than other types of bonds. 
C)  The price of a bond increases as it becomes more risky. 
D)  The yield curve illustrates the relative default risks of alternative types of bonds.

Question 19

A one-year bond currently pays 5% interest.It's expected that it will pay 4.5% next year and 4% the following year.The two-year term premium is 0.2% while the three-year term premium is 0.35%.What is the interest rate on a two-year bond according to the liquidity premium theory?

Accepted Answer

A)  4.5% 
B)  4.75% 
C)  4.95% 
D)  4.975% 
A)  4.5% 
B)  4.75% 
C)  4.95% 
D)  4.975%

Question 20

Which of the following is NOT true of the term premium?

Accepted Answer

A)  It is zero under the expectations theory. 
B)  It is infinite under the segmented markets theory. 
C)  It increases as a bond's maturity increases. 
D)  It is zero for thirty-year bonds. 
A)  It is zero under the expectations theory. 
B)  It is infinite under the segmented markets theory. 
C)  It increases as a bond's maturity increases. 
D)  It is zero for thirty-year bonds.

How do ratings agencies earn income?

Which criterion is NOT useful when evaluating a theory?

Discuss what happened to the market prices on corporate securities relative to government securities during the Great Recession.

Which of the following accurately describes the tax treatment of municipal bonds?

Municipal bonds are issued

The term structure is usually defined with yields on which securities?

Describe the facts found in the bond market about the relationship between interest rates on bonds of different maturities.

Under the expectations theory,if market participants expect that future short-term rates will be higher than current short-term rates,the yield curve will

The expectations theory suggests that

The default risk premium is

According to the liquidity premium theory,if market participants expect that inflation in the future will be lower than it currently is,the yield curve will

Following the downgrade of U.S.debt by Standard & Poor's in 2011

Situations of negative interest rates on short-term bonds resulted from

Unlike the segmented markets theory,the expectations theory attributes the slope of the yield curve to

Which of the following statements is TRUE?

A one-year bond currently pays 5% interest.It's expected that it will pay 4.5% next year and 4% the following year.The two-year term premium is 0.2% while the three-year term premium is 0.35%.What is the interest rate on a two-year bond according to the liquidity premium theory?

Which of the following is NOT true of the term premium?

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

How do ratings agencies earn income?

Which criterion is NOT useful when evaluating a theory?

Discuss what happened to the market prices on corporate securities relative to government securities during the Great Recession.

Which of the following accurately describes the tax treatment of municipal bonds?

Municipal bonds are issued

The term structure is usually defined with yields on which securities?

Describe the facts found in the bond market about the relationship between interest rates on bonds of different maturities.

Under the expectations theory,if market participants expect that future short-term rates will be higher than current short-term rates,the yield curve will

The expectations theory suggests that

The default risk premium is

According to the liquidity premium theory,if market participants expect that inflation in the future will be lower than it currently is,the yield curve will

Following the downgrade of U.S.debt by Standard & Poor's in 2011

Situations of negative interest rates on short-term bonds resulted from

Unlike the segmented markets theory,the expectations theory attributes the slope of the yield curve to

Which of the following statements is TRUE?

A one-year bond currently pays 5% interest.It's expected that it will pay 4.5% next year and 4% the following year.The two-year term premium is 0.2% while the three-year term premium is 0.35%.What is the interest rate on a two-year bond according to the liquidity premium theory?

Which of the following is NOT true of the term premium?

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