Question 1

According to the preferred habitat theory, what does a flat yield curve indicate?

Accepted Answer

A) Short-term interest rates are expected to remain stable. 
B) Short-term interest rates are expected to rise. 
C) Short-term interest ratess are expected to fall. 
D) Long-term interest rates are expected to fall. 
A) Short-term interest rates are expected to remain stable. 
B) Short-term interest rates are expected to rise. 
C) Short-term interest ratess are expected to fall. 
D) Long-term interest rates are expected to fall.

Question 2

A flight to quality refers to a shift by savers from

Accepted Answer

A) bonds and into stocks. 
B) stocks and into gold or other precious metals. 
C) bonds and into real assets, such as real estate. 
D) low-quality bonds and into high-quality bonds. 
A) bonds and into stocks. 
B) stocks and into gold or other precious metals. 
C) bonds and into real assets, such as real estate. 
D) low-quality bonds and into high-quality bonds.

Question 3

If new information becomes available indicating that a company's profits will be much less than previously believed, the flow of funds into the market for its securities will decline

Accepted Answer

A) unless the expected real interest rate on its securities rises. 
B) unless the expected real interest rate on its securities falls. 
C) unless the expected real interest rate on its securities remains unchanged. 
D) irrespective of changes in the expected real interest rate on its securities. 
A) unless the expected real interest rate on its securities rises. 
B) unless the expected real interest rate on its securities falls. 
C) unless the expected real interest rate on its securities remains unchanged. 
D) irrespective of changes in the expected real interest rate on its securities.

Question 4

For the post-World War II period,

Accepted Answer

A) increases in short-term interest rates tend to continue for many periods. 
B) increases in short-term interest rates tend to be quickly followed by decreases. 
C) short-term interest rates have typically been greater than long-term interest rates. 
D) short-term interest rates have fallen persistently from the very high levels that prevailed at the end of World War II. 
A) increases in short-term interest rates tend to continue for many periods. 
B) increases in short-term interest rates tend to be quickly followed by decreases. 
C) short-term interest rates have typically been greater than long-term interest rates. 
D) short-term interest rates have fallen persistently from the very high levels that prevailed at the end of World War II.

Question 5

Which of the following is NOT true of the yield curve for U.S. Treasury securities?

Accepted Answer

A) Typically, it slopes upward. 
B) It depicts the relationship among yields on securities of different maturities. 
C) Typically, it shifts up or down rather than twists. 
D) Typically, it slopes downward. 
A) Typically, it slopes upward. 
B) It depicts the relationship among yields on securities of different maturities. 
C) Typically, it shifts up or down rather than twists. 
D) Typically, it slopes downward.

Question 6

Financial instruments with high interest rates due to higher information costs

Accepted Answer

A) tend to have less risk than similar financial instruments with low information costs. 
B) also tend to be relatively illiquid. 
C) also tend to have higher prices than similar financial instruments with low information costs. 
D) are usually heavily traded, which serves to partially offset their having high information costs. 
A) tend to have less risk than similar financial instruments with low information costs. 
B) also tend to be relatively illiquid. 
C) also tend to have higher prices than similar financial instruments with low information costs. 
D) are usually heavily traded, which serves to partially offset their having high information costs.

Question 7

Savers generally are

Accepted Answer

A) more concerned about expected returns than about the variability of those returns. 
B) risk-neutral. 
C) risk-averse. 
D) unconcerned about expected returns, but very concerned about the variability of those returns. 
A) more concerned about expected returns than about the variability of those returns. 
B) risk-neutral. 
C) risk-averse. 
D) unconcerned about expected returns, but very concerned about the variability of those returns.

Question 8

In August 1998, the risk premium rose because

Accepted Answer

A) investors feared a revival of inflation. 
B) large tax increases in the United States reduced corporate profits and led to fears of increased defaults. 
C) of the Asian financial crisis. 
D) of fraud in the market for municipal bonds. 
A) investors feared a revival of inflation. 
B) large tax increases in the United States reduced corporate profits and led to fears of increased defaults. 
C) of the Asian financial crisis. 
D) of fraud in the market for municipal bonds.

Question 9

The term structure of interest rates

Accepted Answer

A) represents the variation in yields for related instruments differing in maturity. 
B) reflects differing tax treatment received by different instruments. 
C) always results in an upward-sloping yield curve. 
D) usually results in a downward-sloping yield curve. 
A) represents the variation in yields for related instruments differing in maturity. 
B) reflects differing tax treatment received by different instruments. 
C) always results in an upward-sloping yield curve. 
D) usually results in a downward-sloping yield curve.

Question 10

In the early 1980s, when a recession raised concern about corporations' ability to repay debt, there was a dramatic increase in

Accepted Answer

A) the yield on medium-quality corporate bonds relative to the yield on long-term Treasury securities. 
B) the yield on long-term Treasury securities relative to the yield on medium-quality corporate bonds. 
C) the yield on six-month T-bills relative to the yield on long-term Treasury securities. 
D) the yield on interest-earning checking deposits in commercial banks relative to the yield on six-month T-bills. 
A) the yield on medium-quality corporate bonds relative to the yield on long-term Treasury securities. 
B) the yield on long-term Treasury securities relative to the yield on medium-quality corporate bonds. 
C) the yield on six-month T-bills relative to the yield on long-term Treasury securities. 
D) the yield on interest-earning checking deposits in commercial banks relative to the yield on six-month T-bills.

Question 11

The expectations theory suggests that

Accepted Answer

A) the yield curve should normally be upward-sloping. 
B) the yield curve should normally 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 normally be upward-sloping. 
B) the yield curve should normally 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

If a one-year bond currently yields 5% and is expected to yield 7% next year, the preferred habitat theory predicts that the yield today on a two-year bond will be

Accepted Answer

A) 5%. 
B) less than 6%, but more than 5%. 
C) 6%. 
D) more than 6%. 
A) 5%. 
B) less than 6%, but more than 5%. 
C) 6%. 
D) more than 6%.

Question 13

Savers who are risk-averse

Accepted Answer

A) care only about expected returns. 
B) care only about the variability of returns. 
C) care about both expected returns and the variability of returns. 
D) always prefer an investment with a higher expected return to one with a lower expected return. 
A) care only about expected returns. 
B) care only about the variability of returns. 
C) care about both expected returns and the variability of returns. 
D) always prefer an investment with a higher expected return to one with a lower expected return.

Question 14

The risk structure of interest rates refers to

Accepted Answer

A) the amount of additional interest necessary to compensate savers for the greater risk of default on some bonds. 
B) the relationship among the interest rates on similar bonds with different maturities. 
C) the relationship among the interest rates on bonds with the same maturity. 
D) the amount of additional interest necessary to compensate savers for the lesser liquidity of some bonds. 
A) the amount of additional interest necessary to compensate savers for the greater risk of default on some bonds. 
B) the relationship among the interest rates on similar bonds with different maturities. 
C) the relationship among the interest rates on bonds with the same maturity. 
D) the amount of additional interest necessary to compensate savers for the lesser liquidity of some bonds.

Question 15

If the expected path of interest rates on one-year bonds over the next five years is 2%, 4%, 3%, 2%, and 1%, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of

Accepted Answer

A) one year. 
B) two years. 
C) three years. 
D) five years. 
A) one year. 
B) two years. 
C) three years. 
D) five years.

Question 16

Bond ratings

Accepted Answer

A) are published annually by the federal government and are based largely on information contained in corporate tax returns. 
B) are published annually by the federal government and are based on publicly available information. 
C) are published monthly by the federal government and are based on publicly available information. 
D) are published by private bond-rating agencies. 
A) are published annually by the federal government and are based largely on information contained in corporate tax returns. 
B) are published annually by the federal government and are based on publicly available information. 
C) are published monthly by the federal government and are based on publicly available information. 
D) are published by private bond-rating agencies.

Question 17

The existence of rating agencies has

Accepted Answer

A) lowered returns on corporate bonds. 
B) raised returns on corporate bonds. 
C) left returns on corporate bonds largely unaffected. 
D) raised returns on both corporate bonds and Treasury securities. 
A) lowered returns on corporate bonds. 
B) raised returns on corporate bonds. 
C) left returns on corporate bonds largely unaffected. 
D) raised returns on both corporate bonds and Treasury securities.

Question 18

Which of the following is considered a default-risk-free instrument?

Accepted Answer

A) A three-month Treasury bill 
B) A share of stock issued by Google 
C) A three-month commercial paper issued by GE 
D) A ten-year bond issued by Intel 
A) A three-month Treasury bill 
B) A share of stock issued by Google 
C) A three-month commercial paper issued by GE 
D) A ten-year bond issued by Intel

Question 19

During the 1974-1975 recession, the rate on commercial paper increased relative to the rate on T-Bills. This was an indication of the fact that

Accepted Answer

A) investors had become nervous about the ability of the federal government to meet its financial obligations. 
B) the inflation rate had increased significantly. 
C) investors had become concerned about default risk in the short-term market. 
D) interest on commercial paper had lost its exemption from the federal income tax. 
A) investors had become nervous about the ability of the federal government to meet its financial obligations. 
B) the inflation rate had increased significantly. 
C) investors had become concerned about default risk in the short-term market. 
D) interest on commercial paper had lost its exemption from the federal income tax.

Question 20

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.

Exam 7: Risk Structure and Term Structure of Interest Rates

According to the preferred habitat theory, what does a flat yield curve indicate?

A flight to quality refers to a shift by savers from

If new information becomes available indicating that a company's profits will be much less than previously believed, the flow of funds into the market for its securities will decline

For the post-World War II period,

Which of the following is NOT true of the yield curve for U.S. Treasury securities?

Financial instruments with high interest rates due to higher information costs

Savers generally are

In August 1998, the risk premium rose because

The term structure of interest rates

In the early 1980s, when a recession raised concern about corporations' ability to repay debt, there was a dramatic increase in

The expectations theory suggests that

If a one-year bond currently yields 5% and is expected to yield 7% next year, the preferred habitat theory predicts that the yield today on a two-year bond will be

Savers who are risk-averse

The risk structure of interest rates refers to

If the expected path of interest rates on one-year bonds over the next five years is 2%, 4%, 3%, 2%, and 1%, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of

Bond ratings

The existence of rating agencies has

Which of the following is considered a default-risk-free instrument?

During the 1974-1975 recession, the rate on commercial paper increased relative to the rate on T-Bills. This was an indication of the fact that

Municipal bonds are issued

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

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