Exam 6: The Risk and Term Structure of Interest Rates

If the federal government where to raise the income tax rates,would this have any impact on a state's cost of borrowing funds? Explain.

According to the liquidity premium theory of the term structure

According to the expectations theory of the term structure

If the possibility of a default increases because corporations begin to suffer losses,then the default risk on corporate bonds will ________,and the bonds' returns will become ________ uncertain,meaning that the expected return on these bonds will decrease,everything else held constant.

Everything else held constant,if income tax rates were lowered,then

-The steeply upward sloping yield curve in the figure above indicates that

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.

In actual practice,short-term interest rates and long-term interest rates usually move together; this is the major shortcoming of the

Which of the following bonds would have the highest default risk?

Risk premiums on corporate bonds tend to ________ during business cycle expansions and ________ during recessions,everything else held constant.

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.

According to the liquidity premium theory of the term structure,a downward sloping yield curve indicates that short-term interest rates are expected to

Three factors explain the risk structure of interest rates: