Question 1

Corporate bonds are not as liquid as Canada bonds because ________.

Accepted Answer

A)  fewer corporate bonds for any one corporation are traded, making them more costly to sell 
B)  the corporate bond rating must be calculated each time they are traded 
C)  corporate bonds are not callable 
D)  corporate bonds cannot be resold 
A)  fewer corporate bonds for any one corporation are traded, making them more costly to sell 
B)  the corporate bond rating must be calculated each time they are traded 
C)  corporate bonds are not callable 
D)  corporate bonds cannot be resold A

Question 2

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 C

Question 3

As default risk increases and bond prices adjust, 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 B

Question 4

Default risk is the risk that ________.

Accepted Answer

A)  a bond issuer is unable to make interest payments 
B)  a bond issuer is unable to make a profit 
C)  a bond issuer is unable to pay the face value at maturity 
D)  A and C only 
A)  a bond issuer is unable to make interest payments 
B)  a bond issuer is unable to make a profit 
C)  a bond issuer is unable to pay the face value at maturity 
D)  A and C only

Question 5

According to the expectations theory of the term structure ________.

Accepted Answer

A)  the interest rate on long-term bonds will exceed the average of short-term interest rates that people expect to occur over the life of the long-term bonds, because of their preference for short-term securities 
B)  interest rates on bonds of different maturities move together over time 
C)  buyers of bonds prefer short-term to long-term bonds 
D)  buyers require an additional incentive to hold long-term bonds 
A)  the interest rate on long-term bonds will exceed the average of short-term interest rates that people expect to occur over the life of the long-term bonds, because of their preference for short-term securities 
B)  interest rates on bonds of different maturities move together over time 
C)  buyers of bonds prefer short-term to long-term bonds 
D)  buyers require an additional incentive to hold long-term bonds

Question 6

The preferred habitat theory of the term structure is closely related to the ________.

Accepted Answer

A)  expectations theory of the term structure 
B)  segmented markets theory of the term structure 
C)  liquidity premium theory of the term structure 
D)  the inverted yield curve theory of the term structure 
A)  expectations theory of the term structure 
B)  segmented markets theory of the term structure 
C)  liquidity premium theory of the term structure 
D)  the inverted yield curve theory of the term structure

Question 7

Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Canada bonds to the ________.

Accepted Answer

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

Question 8

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.

Accepted Answer

A)  steep upward 
B)  slight upward 
C)  flat 
D)  downward 
A)  steep upward 
B)  slight upward 
C)  flat 
D)  downward

Question 9

Which of the following bonds would have the highest default risk?

Accepted Answer

A)  Provincial bonds 
B)  Investment-grade bonds 
C)  Canada bonds 
D)  Junk bonds 
A)  Provincial bonds 
B)  Investment-grade bonds 
C)  Canada bonds 
D)  Junk bonds

Question 10

Economists' attempts to explain the term structure of interest rates ________.

Accepted Answer

A)  illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence 
B)  illustrate how economists continue to accept theories that fail to explain observed behavior of interest rate movements 
C)  prove that the real world is a special case that tends to get short shrift in theoretical models 
D)  have proved entirely unsatisfactory to date 
A)  illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence 
B)  illustrate how economists continue to accept theories that fail to explain observed behavior of interest rate movements 
C)  prove that the real world is a special case that tends to get short shrift in theoretical models 
D)  have proved entirely unsatisfactory to date

Question 11

When yield curves are flat, ________.

Accepted Answer

A)  long-term interest rates are above short-term interest rates 
B)  short-term interest rates are above long-term interest rates 
C)  short-term interest rates are about the same as long-term interest rates 
D)  medium-term interest rates are above both short-term and long-term interest rates 
A)  long-term interest rates are above short-term interest rates 
B)  short-term interest rates are above long-term interest rates 
C)  short-term interest rates are about the same as long-term interest rates 
D)  medium-term interest rates are above both short-term and long-term interest rates

Question 12

The additional incentive that the purchaser of a Treasury security requires to buy a long-term security rather than a short-term security is called the ________.

Accepted Answer

A)  risk premium 
B)  term premium 
C)  tax premium 
D)  market premium 
A)  risk premium 
B)  term premium 
C)  tax premium 
D)  market premium

Question 13

An increase in default risk on corporate bonds ________ the demand for these bonds, but ________ 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 14

Which of the following statements is true?

Accepted Answer

A)  Because coupon payments on tax-exempt 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 decrease in tax rates will increase the demand for U.S Treasury bonds, lowering their interest rates. 
C)  Interest rates on tax-exempt bonds will be higher than comparable bonds without the tax exemption. 
D)  An decrease in tax rates will increase the supply of U.S Treasury bonds, lowering their interest rates. 
A)  Because coupon payments on tax-exempt 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 decrease in tax rates will increase the demand for U.S Treasury bonds, lowering their interest rates. 
C)  Interest rates on tax-exempt bonds will be higher than comparable bonds without the tax exemption. 
D)  An decrease in tax rates will increase the supply of U.S Treasury bonds, lowering their interest rates.

Question 15

If the expected path of 1-year interest rates over the next five years is 1 percent, 2 percent, 3 percent, 4 percent, and 5 percent, the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of ________.

Accepted Answer

A)  two years 
B)  three years 
C)  four years 
D)  five years 
A)  two years 
B)  three years 
C)  four years 
D)  five years

Question 16

If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five-year bond is ________.

Accepted Answer

A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  7 percent 
A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  7 percent

Question 17

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 Canada bonds shifts to the ________.

Accepted Answer

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

Question 18

A plot of the interest rates on default-free Canada bonds with different terms to maturity is called ________.

Accepted Answer

A)  a risk-structure curve 
B)  a default-free curve 
C)  a yield curve 
D)  an interest-rate curve 
A)  a risk-structure curve 
B)  a default-free curve 
C)  a yield curve 
D)  an interest-rate curve

Question 19

Which of the following securities has the lowest interest rate?

Accepted Answer

A)  Junk bonds 
B)  Canada bonds 
C)  Investment-grade bonds 
D)  Corporate Baa bonds 
A)  Junk bonds 
B)  Canada bonds 
C)  Investment-grade bonds 
D)  Corporate Baa bonds

Question 20

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

Exam 6: The Risk and Term Structure of Interest Rates

Corporate bonds are not as liquid as Canada bonds because ________.

An inverted yield curve ________.

As default risk increases and bond prices adjust, the expected return on corporate bonds ________, and the return becomes ________ uncertain, everything else held constant.

Default risk is the risk that ________.

According to the expectations theory of the term structure ________.

The preferred habitat theory of the term structure is closely related to the ________.

Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Canada bonds to the ________.

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 bonds would have the highest default risk?

Economists' attempts to explain the term structure of interest rates ________.

When yield curves are flat, ________.

The additional incentive that the purchaser of a Treasury security requires to buy a long-term security rather than a short-term security is called the ________.

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

Which of the following statements is true?

If the expected path of 1-year interest rates over the next five years is 1 percent, 2 percent, 3 percent, 4 percent, and 5 percent, the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of ________.

If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five-year bond is ________.

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 Canada bonds shifts to the ________.

A plot of the interest rates on default-free Canada bonds with different terms to maturity is called ________.

Which of the following securities has the lowest interest rate?

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 ________.

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behaviour of Interest Rates

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

An Economic Analysis of Financial Structure

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

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

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

Filters

As default risk increases and bond prices adjust, the expected return on corporate bonds , and the return becomes uncertain, everything else held constant.

Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the and the demand curve for Canada bonds to the .

An increase in default risk on corporate bonds the demand for these bonds, but the demand for default-free bonds, 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 Canada bonds shifts to the .