Question 1

-The U-shaped yield curve in the figure above indicates that the inflation rate is expected to

Accepted Answer

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

Question 2

As default risk decreases, the expected return on corporate bonds ________, and the return becomes ________ uncertain, everything else held constant.

Accepted Answer

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

Question 3

The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S. Treasury bonds. This is due to

Accepted Answer

A)  a reduction in risk. 
B)  a reduction in maturity. 
C)  a flight to quality. 
D)  a flight to liquidity. 
A)  a reduction in risk. 
B)  a reduction in maturity. 
C)  a flight to quality. 
D)  a flight to liquidity.

Question 4

An inverted yield curve

Accepted Answer

A)  slopes up. 
B)  is flat. 
C)  slopes down. 
D)  has a U shape. 
A)  slopes up. 
B)  is flat. 
C)  slopes down. 
D)  has a U shape.

Question 5

A decrease in default risk on corporate bonds ________ the demand for these bonds, and ________ the demand for default-free bonds, everything else held constant.

Accepted Answer

A)  increases; lowers 
B)  lowers; increases 
C)  does not change; greatly increases 
D)  moderately lowers; does not change 
A)  increases; lowers 
B)  lowers; increases 
C)  does not change; greatly increases 
D)  moderately lowers; does not change

Question 6

-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. 
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 7

When short-term interest rates are expected to fall sharply in the future, the yield curve will

Accepted Answer

A)  slope up. 
B)  be flat. 
C)  be inverted. 
D)  be an inverted U shape. 
A)  slope up. 
B)  be flat. 
C)  be inverted. 
D)  be an inverted U shape.

Question 8

During the Great Depression years 1930-1933 there was a very high rate of business failures and defaults, we would expect the risk premium for ________ bonds to be very high.

Accepted Answer

A)  U.S. Treasury 
B)  corporate Aaa 
C)  municipal 
D)  corporate Baa 
A)  U.S. Treasury 
B)  corporate Aaa 
C)  municipal 
D)  corporate Baa

Question 9

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

Question 10

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. 
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 11

The ________ of the term structure states the following: the interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of the long-term bond plus a term premium that responds to supply and demand conditions for that bond.

Accepted Answer

A)  segmented markets theory 
B)  expectations theory 
C)  liquidity premium theory 
D)  separable markets theory 
A)  segmented markets theory 
B)  expectations theory 
C)  liquidity premium theory 
D)  separable markets theory

Question 12

Which of the following statements is true?

Accepted Answer

A)  State and local governments cannot default on their bonds. 
B)  Bonds issued by state and local governments are called municipal bonds. 
C)  All government issued bonds - local, state, and federal - are federal income tax exempt. 
D)  The coupon payment on municipal bonds is usually higher than the coupon payment on Treasury bonds. 
A)  State and local governments cannot default on their bonds. 
B)  Bonds issued by state and local governments are called municipal bonds. 
C)  All government issued bonds - local, state, and federal - are federal income tax exempt. 
D)  The coupon payment on municipal bonds is usually higher than the coupon payment on Treasury bonds.

Question 13

The segmented markets theory can explain

Accepted Answer

A)  why yield curves usually tend to slope upward. 
B)  why interest rates on bonds of different maturities tend to move together. 
C)  why yield curves tend to slope upward when short-term interest rates are low and to be inverted when short-term interest rates are high. 
D)  why yield curves have been used to forecast business cycles. 
A)  why yield curves usually tend to slope upward. 
B)  why interest rates on bonds of different maturities tend to move together. 
C)  why yield curves tend to slope upward when short-term interest rates are low and to be inverted when short-term interest rates are high. 
D)  why yield curves have been used to forecast business cycles.

Question 14

The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is

Accepted Answer

A)  interest rate risk. 
B)  inflation risk. 
C)  moral hazard. 
D)  default risk. 
A)  interest rate risk. 
B)  inflation risk. 
C)  moral hazard. 
D)  default risk.

Question 15

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

Yes, if the federal government raises in

Question 16

Bonds with relatively low risk of default are called ________ securities and have a rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called ________.

Accepted Answer

A)  investment grade; lower grade 
B)  investment grade; junk bonds 
C)  high quality; lower grade 
D)  high quality; junk bonds 
A)  investment grade; lower grade 
B)  investment grade; junk bonds 
C)  high quality; lower grade 
D)  high quality; junk bonds

Question 17

Everything else held constant, an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds, and ________ the demand for U.S. government bonds.

Accepted Answer

A)  increasing; increasing 
B)  increasing; decreasing 
C)  decreasing; increasing 
D)  decreasing; decreasing 
A)  increasing; increasing 
B)  increasing; decreasing 
C)  decreasing; increasing 
D)  decreasing; decreasing

Question 18

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

Question 19

If 1-year interest rates for the next five years are expected to be 4, 2, 5, 4, and 5 percent, and the 5-year term premium is 1 percent, than the 5-year bond rate will be

Accepted Answer

A)  2 percent. 
B)  3 percent. 
C)  4 percent. 
D)  5 percent. 
A)  2 percent. 
B)  3 percent. 
C)  4 percent. 
D)  5 percent.

Question 20

A(n) ________ in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds, all else equal.

Accepted Answer

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

Exam 6: The Risk and Term Structure of Interest Rates

-The U-shaped yield curve in the figure above indicates that the inflation rate is expected to

As default risk decreases, the expected return on corporate bonds ________, and the return becomes ________ uncertain, everything else held constant.

The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S. Treasury bonds. This is due to

An inverted yield curve

A decrease in default risk on corporate bonds ________ the demand for these bonds, and ________ the demand for default-free bonds, everything else held constant.

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

When short-term interest rates are expected to fall sharply in the future, the yield curve will

During the Great Depression years 1930-1933 there was a very high rate of business failures and defaults, we would expect the risk premium for ________ bonds to be very high.

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

The risk structure of interest rates is

The ________ of the term structure states the following: the interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of the long-term bond plus a term premium that responds to supply and demand conditions for that bond.

Which of the following statements is true?

The segmented markets theory can explain

The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is

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.

Bonds with relatively low risk of default are called ________ securities and have a rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called ________.

Everything else held constant, an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds, and ________ the demand for U.S. government bonds.

Bonds with relatively high risk of default are called

If 1-year interest rates for the next five years are expected to be 4, 2, 5, 4, and 5 percent, and the 5-year term premium is 1 percent, than the 5-year bond rate will be

A(n) ________ in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds, all else equal.

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behavior of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Nonbank Finance

Financial Derivatives

Conflicts of Interest in the Financial Industry

Central Banks and the Federal Reserve System

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory, Inflation, and the Demand for Money

Aggregate Demand and Supply Analysis

Monetary Policy Theory

Transmission Mechanisms of Monetary Policy

Filters

As default risk decreases, the expected return on corporate bonds , and the return becomes uncertain, everything else held constant.

A decrease in default risk on corporate bonds the demand for these bonds, and the demand for default-free bonds, everything else held constant.

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

Bonds with relatively low risk of default are called securities and have a rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called .

Everything else held constant, an increase in marginal tax rates would likely have the effect of the demand for municipal bonds, and the demand for U.S. government bonds.

A(n) in the liquidity of corporate bonds will the price of corporate bonds and the yield on corporate bonds, all else equal.