Question 1

A moderately upward-sloping yield curve indicates that short-term interest rates are expected to

Accepted Answer

A) neither rise nor fall in the near future. 
B) remain relatively unchanged, but that long-term rates are expected to fall. 
C) neither rise nor fall, but that long-term rates are expected to rise moderately. 
D) rise moderately in the near future. 
A) neither rise nor fall in the near future. 
B) remain relatively unchanged, but that long-term rates are expected to fall. 
C) neither rise nor fall, but that long-term rates are expected to rise moderately. 
D) rise moderately in the near future.

Question 2

(I)If a corporate bond becomes less liquid, the demand for the bond will fall, causing the interest rate to rise. (II)If a corporate bond becomes less liquid, the demand for Treasury bonds does not change.

Accepted Answer

A) (I)is true, (II)false. 
B) (I)is false, (II)true. 
C) Both are true. 
D) Both are false. 
A) (I)is true, (II)false. 
B) (I)is false, (II)true. 
C) Both are true. 
D) Both are false.

Question 3

Holding everything else the same, if a corporation's earnings rise, then the default risk on its bonds will ________ and the expected return on those bonds will ________.

Accepted Answer

A) increase; decrease 
B) decrease; decrease 
C) increase; increase 
D) decrease; increase 
A) increase; decrease 
B) decrease; decrease 
C) increase; increase 
D) decrease; increase

Question 4

According to the liquidity premium theory of the term structure,

Accepted Answer

A) because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time. 
B) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. 
C) because of the positive term premium, the yield curve cannot be downward-sloping. 
D) all of the above. 
E) only A and B of the above. 
A) because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time. 
B) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. 
C) because of the positive term premium, the yield curve cannot be downward-sloping. 
D) all of the above. 
E) only A and B of the above.

Question 5

Which of the following statements are true?

Accepted Answer

A) Because coupon payments on municipal bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in higher income tax brackets. 
B) An increase in tax rates will increase the demand for municipal bonds, lowering their interest rates. 
C) Interest rates on municipal bonds will be lower than on comparable bonds without the tax exemption. 
D) All of the above are true statements. 
E) Only A and B are true statements. 
A) Because coupon payments on municipal bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in higher income tax brackets. 
B) An increase in tax rates will increase the demand for municipal bonds, lowering their interest rates. 
C) Interest rates on municipal bonds will be lower than on comparable bonds without the tax exemption. 
D) All of the above are true statements. 
E) Only A and B are true statements.

Question 6

Holding everything else constant, if a corporation begins to suffer large losses, then the default risk on its bonds will ________ and the expected return on those bonds will ________.

Accepted Answer

A) increase: increase 
B) decrease; increase 
C) increase; decrease 
D) decrease; decrease 
A) increase: increase 
B) decrease; increase 
C) increase; decrease 
D) decrease; decrease

Question 7

Of the four theories that explain how interest rates on bonds with different terms to maturity are related, the one that views long-term interest rates as equaling the average of future short-term rates expected to occur over the life of the bond is the

Accepted Answer

A) pure expectations theory. 
B) preferred habitat theory. 
C) liquidity premium theory. 
D) segmented markets theory. 
A) pure expectations theory. 
B) preferred habitat theory. 
C) liquidity premium theory. 
D) segmented markets theory.

Question 8

The Bush tax cut passed in 2001 reduces the top income tax bracket from 39 percent to 35 percent over the next ten years. As a result of this tax cut, the demand for municipal bonds should shift to the ________ and the interest rate on municipal bonds should ________.

Accepted Answer

A) right; decline 
B) right; increase 
C) left; decline 
D) left; increase 
A) right; decline 
B) right; increase 
C) left; decline 
D) left; increase

Question 9

If a corporation's earnings rise, then the default risk on its bonds will ________ and the equilibrium interest rate on these bonds will ________.

Accepted Answer

A) increase; decrease 
B) decrease; decrease 
C) increase; increase 
D) decrease; increase 
A) increase; decrease 
B) decrease; decrease 
C) increase; increase 
D) decrease; increase

Question 10

Which of the following long-term bonds should have the lowest interest rate?

Accepted Answer

A) Corporate Baa bonds 
B) U)S. Treasury bonds 
C) Corporate Aaa bonds 
D) Municipal bonds 
A) Corporate Baa bonds 
B) U)S. Treasury bonds 
C) Corporate Aaa bonds 
D) Municipal bonds

Question 11

The risk structure of interest rates describes the relationship between the interest rates of different bonds with the same maturities.

Accepted Answer

A) True 
 B)False

Question 12

Risk occurs when the issuer of the bond is unable or unwilling to make interest payments when promised or pay off the face value when the bond matures.

Accepted Answer

A) True 
 B)False

Question 13

If Moody's or Standard and Poor's downgrades its rating on a corporate bond, the demand for the bond ________ and its yield ________.

Accepted Answer

A) increases; decreases 
B) decreases; increases 
C) increases; increases 
D) decreases; decreases 
A) increases; decreases 
B) decreases; increases 
C) increases; increases 
D) decreases; decreases

Question 14

The liquidity premium theory of the term structure

Accepted Answer

A) assumes investors tend to prefer short-term bonds because they have less interest-rate risk. 
B) assumes that interest rates on the long-term bond respond to demand and supply conditions for that bond. 
C) assumes that an average of expected short-term rates is an important component of interest rates on long-term bonds. 
D) assumes all of the above. 
E) assumes none of the above. 
A) assumes investors tend to prefer short-term bonds because they have less interest-rate risk. 
B) assumes that interest rates on the long-term bond respond to demand and supply conditions for that bond. 
C) assumes that an average of expected short-term rates is an important component of interest rates on long-term bonds. 
D) assumes all of the above. 
E) assumes none of the above.

Question 15

According to the liquidity premium theory of the term structure, when the yield curve has its usual slope, the market expects

Accepted Answer

A) short-term interest rates to rise sharply. 
B) short-term interest rates to drop sharply. 
C) short-term interest rates to stay near their current levels. 
D) none of the above. 
A) short-term interest rates to rise sharply. 
B) short-term interest rates to drop sharply. 
C) short-term interest rates to stay near their current levels. 
D) none of the above.

Question 16

If the yield curve slope is flat, the liquidity premium theory indicates that the market is predicting

Accepted Answer

A) a mild rise in short-term interest rates in the near future and a mild decline further out in the future. 
B) constant short-term interest rates in the near future and further out in the future. 
C) a mild decline in short-term interest rates in the near future and a continuing mild decline further out in the future. 
D) constant short-term interest rates in the near future and a mild decline further out in the future. 
A) a mild rise in short-term interest rates in the near future and a mild decline further out in the future. 
B) constant short-term interest rates in the near future and further out in the future. 
C) a mild decline in short-term interest rates in the near future and a continuing mild decline further out in the future. 
D) constant short-term interest rates in the near future and a mild decline further out in the future.

Question 17

________ are investment advisory firms that rate the quality of corporate and municipal bonds in terms of probability of default.

Accepted Answer

A) Financial institutions 
B) Credit-rating agencies 
C) Securities companies 
D) none of the above 
A) Financial institutions 
B) Credit-rating agencies 
C) Securities companies 
D) none of the above

Question 18

Which theory of the term structure proposes that bonds of different maturities are not substitutes for one another?

Accepted Answer

A) market segmentation theory 
B) expectations theory 
C) liquidity premium theory 
D) separable markets theory 
A) market segmentation theory 
B) expectations theory 
C) liquidity premium theory 
D) separable markets theory

Exam 5: How Do Risk and Term Structure Affect Interest Rates

A moderately upward-sloping yield curve indicates that short-term interest rates are expected to

(I)If a corporate bond becomes less liquid, the demand for the bond will fall, causing the interest rate to rise. (II)If a corporate bond becomes less liquid, the demand for Treasury bonds does not change.

Holding everything else the same, if a corporation's earnings rise, then the default risk on its bonds will ________ and the expected return on those bonds will ________.

According to the liquidity premium theory of the term structure,

Which of the following statements are true?

Holding everything else constant, if a corporation begins to suffer large losses, then the default risk on its bonds will ________ and the expected return on those bonds will ________.

Of the four theories that explain how interest rates on bonds with different terms to maturity are related, the one that views long-term interest rates as equaling the average of future short-term rates expected to occur over the life of the bond is the

The Bush tax cut passed in 2001 reduces the top income tax bracket from 39 percent to 35 percent over the next ten years. As a result of this tax cut, the demand for municipal bonds should shift to the ________ and the interest rate on municipal bonds should ________.

If a corporation's earnings rise, then the default risk on its bonds will ________ and the equilibrium interest rate on these bonds will ________.

Which of the following long-term bonds should have the lowest interest rate?

The risk structure of interest rates describes the relationship between the interest rates of different bonds with the same maturities.

Risk occurs when the issuer of the bond is unable or unwilling to make interest payments when promised or pay off the face value when the bond matures.

If Moody's or Standard and Poor's downgrades its rating on a corporate bond, the demand for the bond ________ and its yield ________.

The liquidity premium theory of the term structure

According to the liquidity premium theory of the term structure, when the yield curve has its usual slope, the market expects

If the yield curve slope is flat, the liquidity premium theory indicates that the market is predicting

________ are investment advisory firms that rate the quality of corporate and municipal bonds in terms of probability of default.

Which theory of the term structure proposes that bonds of different maturities are not substitutes for one another?

Why Study Financial Markets and Institutions

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation

Why Do Interest Rates Change

Are Financial Markets Efficient

Why Do Financial Institutions Exist

Why Do Financial Crises Occur and Why Are They so Damaging to the Economy

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging With Financial Derivatives

Savings Associations and Credit Unions

Finance Companies

Filters

Holding everything else the same, if a corporation's earnings rise, then the default risk on its bonds will and the expected return on those bonds will .

Holding everything else constant, if a corporation begins to suffer large losses, then the default risk on its bonds will and the expected return on those bonds will .

The Bush tax cut passed in 2001 reduces the top income tax bracket from 39 percent to 35 percent over the next ten years. As a result of this tax cut, the demand for municipal bonds should shift to the and the interest rate on municipal bonds should .

If a corporation's earnings rise, then the default risk on its bonds will and the equilibrium interest rate on these bonds will .

If Moody's or Standard and Poor's downgrades its rating on a corporate bond, the demand for the bond and its yield .