Question 1

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 2

Under the Expectations Hypothesis of the term structure of interest rates, explain the impact of a U.S.Treasury decision to phase out the 30-year bond and to only focus on 3-month, 1-year, 5-year and 10-year bonds.

Accepted Answer

This decision should not have any impact

Question 3

Under the expectations hypothesis, if expectations are for lower inflation in the future than what it currently is, the yield curve's slope will:

Accepted Answer

A) become more upward sloping. 
B) become flat. 
C) be negative. 
D) be vertical. 
A) become more upward sloping. 
B) become flat. 
C) be negative. 
D) be vertical.

Question 4

Why do yield curves usually slope upward?

Accepted Answer

The upward sloping yield curve is the mo

Question 5

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

Accepted Answer

An inverted yield curve is a valuable fo

Question 6

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 bi

Question 7

Assume an investor has a choice of 3 consecutive one-year bonds or one 3-year bond.Assuming the Expectations Hypothesis of the term structure of interest rates is correct the:

Accepted Answer

A) average interest rate of the three consecutive one-year bonds should be less than the 3-year bond to reflect the risk premium. 
B) interest rate of the 3-year bond should equal the average interest rate of the 3 one-year bonds. 
C) three consecutive one-year bonds must have the same interest rate. 
D) current one-year interest rate must equal the current 3-year interest rate. 
A) average interest rate of the three consecutive one-year bonds should be less than the 3-year bond to reflect the risk premium. 
B) interest rate of the 3-year bond should equal the average interest rate of the 3 one-year bonds. 
C) three consecutive one-year bonds must have the same interest rate. 
D) current one-year interest rate must equal the current 3-year interest rate.

Question 8

The risk premium that investors associate with a bond increases with all of the following except:

Accepted Answer

A) maturity. 
B) inflation risk increases. 
C) interest-rate risk. 
D) an improved bond rating. 
A) maturity. 
B) inflation risk increases. 
C) interest-rate risk. 
D) an improved bond rating.

Question 9

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 10

The yield curve for U.S.Treasury securities allows us to draw the following conclusions, except that:

Accepted Answer

A) long-term yields tend to higher than short term yields. 
B) interest rates of different maturities tend to move. 
C) long-term rates tend to equal short-term rates. 
D) yields on short-term securities are more volatile than yields on long-term bonds. 
A) long-term yields tend to higher than short term yields. 
B) interest rates of different maturities tend to move. 
C) long-term rates tend to equal short-term rates. 
D) yields on short-term securities are more volatile than yields on long-term bonds.

Question 11

Briefly describe the two different types of junk bonds (high-yield bonds).

Accepted Answer

There are two types of junk bonds; there

Question 12

If a bond's rating improves it should cause the bond's price:

Accepted Answer

A) and yield to increase, all other factors constant. 
B) and yield to decrease, all other factors constant. 
C) to increase and its yield to decrease, all other factors constant. 
D) to decrease and its yield to increase, all other factors constant. 
A) and yield to increase, all other factors constant. 
B) and yield to decrease, all other factors constant. 
C) to increase and its yield to decrease, all other factors constant. 
D) to decrease and its yield to increase, all other factors constant.

Question 13

The term structure of interest rates:

Accepted Answer

A) always results in an upward sloping yield curve. 
B) represents the variation in yields for securities differing in maturities. 
C) usually results in a flat yield curve. 
D) usually results in a downward sloping yield curve. 
A) always results in an upward sloping yield curve. 
B) represents the variation in yields for securities differing in maturities. 
C) usually results in a flat yield curve. 
D) usually results in a downward sloping yield curve.

Question 14

Why might we expect to see a high correlation between increases in the risk structure of interest rates and the yield curve becoming inverted?

Accepted Answer

Both situations, the risk structure of i

Question 15

The Expectations Hypothesis cannot explain why:

Accepted Answer

A) yields on securities of different maturities move together. 
B) short-term yields are more volatile than long term yields. 
C) yield curves usually slope upward. 
D) long-term bonds usually are less liquid than short-term bonds with the same default risk. 
A) yields on securities of different maturities move together. 
B) short-term yields are more volatile than long term yields. 
C) yield curves usually slope upward. 
D) long-term bonds usually are less liquid than short-term bonds with the same default risk.

Question 16

Taxes play an important role in bond returns because:

Accepted Answer

A) all interest from owning bonds is taxed. 
B) all governments (federal, state, municipal) tax bonds similarly. 
C) some bond interest is exempt from some government taxation, so after tax returns across bonds can vary considerably. 
D) only U.S.Treasury bonds are tax-exempt, so investors should always seek higher returns from other bonds. 
A) all interest from owning bonds is taxed. 
B) all governments (federal, state, municipal) tax bonds similarly. 
C) some bond interest is exempt from some government taxation, so after tax returns across bonds can vary considerably. 
D) only U.S.Treasury bonds are tax-exempt, so investors should always seek higher returns from other bonds.

Question 17

The reason for the increase in inflation risk over time is due to the fact that:

Accepted Answer

A) the inflation rate always increases over time. 
B) we always have inflation. 
C) it is more difficult to forecast inflation over longer periods of time. 
D) investors are more focused on nominal returns than real returns. 
A) the inflation rate always increases over time. 
B) we always have inflation. 
C) it is more difficult to forecast inflation over longer periods of time. 
D) investors are more focused on nominal returns than real returns.

Question 18

Suppose that interest rates are expected to remain unchanged over the next few years.However, there is a risk premium for longer-term bonds.According to the liquidity premium theory, the yield curve should be:

Accepted Answer

A) upward sloping and very steep. 
B) upward sloping and relatively flat. 
C) inverted. 
D) vertical. 
A) upward sloping and very steep. 
B) upward sloping and relatively flat. 
C) inverted. 
D) vertical.

Question 19

Under the Expectations Hypothesis, a downward-sloping yield curve suggests:

Accepted Answer

A) investors expect future short-term interest rates to fall. 
B) investors expect future short-term interest rates to rise. 
C) this is a trick question, the yield curve always slopes upward. 
D) investors expect future short-term interest rates to remain constant. 
A) investors expect future short-term interest rates to fall. 
B) investors expect future short-term interest rates to rise. 
C) this is a trick question, the yield curve always slopes upward. 
D) investors expect future short-term interest rates to remain constant.

Question 20

During economic slowdowns why would you expect the risk premium to increase the most between U.S.Treasury bonds and junk bonds?

Accepted Answer

While it is True that during economic sl

Exam 7: The Risk and Term Structure of Interest Rates

A flight to quality refers to a move by investors:

Under the Expectations Hypothesis of the term structure of interest rates, explain the impact of a U.S.Treasury decision to phase out the 30-year bond and to only focus on 3-month, 1-year, 5-year and 10-year bonds.

Under the expectations hypothesis, if expectations are for lower inflation in the future than what it currently is, the yield curve's slope will:

Why do yield curves usually slope upward?

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

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

Assume an investor has a choice of 3 consecutive one-year bonds or one 3-year bond.Assuming the Expectations Hypothesis of the term structure of interest rates is correct the:

The risk premium that investors associate with a bond increases with all of the following except:

The default-risk premium:

The yield curve for U.S.Treasury securities allows us to draw the following conclusions, except that:

Briefly describe the two different types of junk bonds (high-yield bonds).

If a bond's rating improves it should cause the bond's price:

The term structure of interest rates:

Why might we expect to see a high correlation between increases in the risk structure of interest rates and the yield curve becoming inverted?

The Expectations Hypothesis cannot explain why:

Taxes play an important role in bond returns because:

The reason for the increase in inflation risk over time is due to the fact that:

Suppose that interest rates are expected to remain unchanged over the next few years.However, there is a risk premium for longer-term bonds.According to the liquidity premium theory, the yield curve should be:

Under the Expectations Hypothesis, a downward-sloping yield curve suggests:

During economic slowdowns why would you expect the risk premium to increase the most between U.S.Treasury bonds and junk bonds?

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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