Exam 6: The Risk and Term Structure of Interest Rates

During a "flight to quality"

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

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.

A decrease in the liquidity of corporate bonds, other things being equal, shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________.

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

The spread between the interest rates on bonds with default risk and default-free bonds is called the

Everything else held constant, if the tax-exempt status of municipal bonds were eliminated, then

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

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

A decrease in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant.

If the yield curve has a mild upward slope, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting

When yield curves are downward sloping,

If investors expect interest rates to fall significantly in the future, the yield curve will be inverted. This means that the yield curve has a ________ slope.

Which of the following statements is true?

According to the expectations theory of the term structure

Everything else held constant, abolishing all taxes will

According to the liquidity premium theory, a yield curve that is flat means that

Which of the following securities has the lowest interest rate?

An increase in default risk on corporate bonds ________ the demand for these bonds, but ________ the demand for default-free bonds, everything else held constant.

Economists' attempts to explain the term structure of interest rates