Question 1

Use the following figure to answer the questions :

-The U-shaped yield curve in the figure above indicates that short-term interest rates are expected to

Accepted Answer

A) rise in the near-term and fall later on. 
B) fall sharply in the near-term and rise later on. 
C) fall moderately in the near-term and rise later on. 
D) remain unchanged in the near-term and rise later on.

Question 2

Which of the following bonds are considered to be default-risk free?

Accepted Answer

A) Municipal bonds 
B) Investment-grade bonds 
C) U.S.Treasury bonds 
D) Junk bonds

Question 3

The expectations theory and the segmented markets theory do not explain the facts very well,but they provide the groundwork for the most widely accepted theory of the term structure of interest rates,

Accepted Answer

A) the Keynesian theory. 
B) separable markets theory. 
C) liquidity premium theory. 
D) the asset market approach.

Question 4

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

Accepted Answer

A) rise in the future. 
B) remain unchanged in the future. 
C) decline moderately in the future. 
D) decline sharply in the future.

Question 5

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.

Accepted Answer

The answer of If the federal government where to raise...

Question 6

According to this theory of the term structure,bonds of different maturities are not substitutes for one another.

Accepted Answer

A) Segmented markets theory 
B) Expectations theory 
C) Liquidity premium theory 
D) Separable markets theory

Question 7

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.

Accepted Answer

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

Question 8

Differences in ________ explain why interest rates on Treasury securities are not all the same.

Accepted Answer

A) risk 
B) liquidity 
C) time to maturity 
D) tax characteristics

Question 9

When the Treasury bond market becomes more liquid,other things equal,the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.

Accepted Answer

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

Question 10

If 1-year interest rates for the next three years are expected to be 4,2,and 3 percent,and the 3-year term premium is 1 percent,than the 3-year bond rate will be

Accepted Answer

A) 1 percent. 
B) 2 percent. 
C) 3 percent. 
D) 4 percent.

Question 11

If a higher inflation is expected,what would you expect to happen to the shape of the yield curve? Why?

Accepted Answer

The answer of If a higher inflation is expected,what would...

Question 12

U.S.government bonds have no default risk because

Accepted Answer

A) they are backed by the full faith and credit of the federal government. 
B) the federal government can increase taxes to pay its obligations. 
C) they are backed with gold reserves. 
D) they can be exchanged for silver at any time.

Question 13

Everything else held constant,the interest rate on municipal bonds rises relative to the interest rate on Treasury securities when

Accepted Answer

A) income tax rates are lowered. 
B) income tax rates are raised. 
C) municipal bonds become more widely traded. 
D) corporate bonds become riskier.

Question 14

The term structure of interest rates is

Accepted Answer

A) the relationship among interest rates of different bonds with the same maturity. 
B) the structure of how interest rates move over time. 
C) the relationship among the term to maturity of different bonds. 
D) the relationship among interest rates on bonds with different maturities.

Question 15

The risk structure of interest rates is

Accepted Answer

A) the structure of how interest rates move over time. 
B) the relationship among interest rates of different bonds with the same maturity. 
C) the relationship among the term to maturity of different bonds. 
D) the relationship among interest rates on bonds with different maturities.

Question 16

If the expected path of 1-year interest rates over the next four years is 5 percent,4 percent,2 percent,and 1 percent,then the expectations theory predicts that today's interest rate on the four-year bond is

Accepted Answer

A) 1 percent. 
B) 2 percent. 
C) 3 percent. 
D) 4 percent.

Question 17

The collapse of the subprime mortgage market

Accepted Answer

A) did not affect the corporate bond market. 
B) increased the perceived riskiness of Treasury securities. 
C) reduced the Baa-Aaa spread. 
D) increased the Baa-Aaa spread.

Question 18

An increase in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield of Treasury bonds,everything else held constant.

Accepted Answer

A) increase; increase 
B) reduce; reduce 
C) increase; reduce 
D) reduce; increase

Question 19

Bonds with relatively high risk of default are called

Accepted Answer

A) Brady bonds. 
B) junk bonds. 
C) zero coupon bonds. 
D) investment grade bonds.

Question 20

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

Accepted Answer

A) the interest rate on municipal bonds would fall. 
B) the interest rate on Treasury bonds would rise. 
C) the interest rate on municipal bonds would rise. 
D) the price of Treasury bonds would fall.

Exam 6: The Risk and Term Structure of Interest Rates

Use the following figure to answer the questions : -The U-shaped yield curve in the figure above indicates that short-term interest rates are expected to