Question 1

According to the liquidity premium theory of the term structure ________.

Accepted Answer

A)  bonds of different maturities are not substitutes 
B)  if yield curves are downward sloping, then short-term interest rates are expected to fall by so much that, even when the positive term premium is added, long-term rates fall below short-term rates 
C)  yield curves should never slope downward 
D)  interest rates on bonds of different maturities do not move together over time 
A)  bonds of different maturities are not substitutes 
B)  if yield curves are downward sloping, then short-term interest rates are expected to fall by so much that, even when the positive term premium is added, long-term rates fall below short-term rates 
C)  yield curves should never slope downward 
D)  interest rates on bonds of different maturities do not move together over time

Question 2

If bonds with different maturities are perfect substitutes, then the ________ on these bonds must be equal.

Accepted Answer

A)  expected return 
B)  surprise return 
C)  surplus return 
D)  excess return 
A)  expected return 
B)  surprise return 
C)  surplus return 
D)  excess return

Question 3

Bonds with relatively low risk of default are called ________.

Accepted Answer

A)  zero coupon bonds 
B)  junk bonds 
C)  investment grade bonds 
D)  fallen angels 
A)  zero coupon bonds 
B)  junk bonds 
C)  investment grade bonds 
D)  fallen angels

Question 4

When interest rates on 1-2-3-4-5 year bonds are 2.0, 2.1, 2.3, 2.4, and 2.5 percent respectively, what information do we derive on future economic growth and real output?

Accepted Answer

According to these interest rates, the y

Question 5

The interest rate on tax-exempt bonds falls relative to the interest rate on U.S. Treasury securities when ________.

Accepted Answer

A)  there is a major default in the tax-exempt bond market 
B)  income tax rates are raised 
C)  tax-exempt bonds become less widely traded 
D)  corporate bonds become riskier 
A)  there is a major default in the tax-exempt bond market 
B)  income tax rates are raised 
C)  tax-exempt bonds become less widely traded 
D)  corporate bonds become riskier

Question 6

Which of the following statements is true?

Accepted Answer

A)  A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. 
B)  The interest rate on corporate bonds decreases as default risk increases. 
C)  A corporate bond's return becomes less uncertain as default risk increases. 
D)  As their relative riskiness increases, the interest rate on corporate bonds increases relative to the interest rate on default-free bonds. 
A)  A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. 
B)  The interest rate on corporate bonds decreases as default risk increases. 
C)  A corporate bond's return becomes less uncertain as default risk increases. 
D)  As their relative riskiness increases, the interest rate on corporate bonds increases relative to the interest rate on default-free bonds.

Question 7

According to the liquidity premium theory of the term structure, a flat 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 
A)  rise in the future 
B)  remain unchanged in the future 
C)  decline moderately in the future 
D)  decline sharply in the future

Question 8

An inverted yield curve predicts that short-term interest rates ________.

Accepted Answer

A)  are expected to rise in the future 
B)  will rise and then fall in the future 
C)  will remain unchanged in the future 
D)  will fall in the future 
A)  are expected to rise in the future 
B)  will rise and then fall in the future 
C)  will remain unchanged in the future 
D)  will fall in the future

Question 9

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 ________.

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

Question 10

As their relative riskiness ________, the equilibrium price of corporate bonds ________ relative to the expected return on default-free bonds, everything else held constant.

Accepted Answer

A)  increases; increases 
B)  increases; decreases 
C)  decreases; decreases 
D)  decreases; does not change 
A)  increases; increases 
B)  increases; decreases 
C)  decreases; decreases 
D)  decreases; does not change

Question 11

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

Question 12

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 13

A ________ yield curve predicts a future increase in inflation.

Accepted Answer

A)  steeply upward sloping 
B)  slight upward sloping 
C)  flat 
D)  downward sloping 
A)  steeply upward sloping 
B)  slight upward sloping 
C)  flat 
D)  downward sloping

Question 14

Which of the following statements is true?

Accepted Answer

A)  A liquid asset is one that can be quickly and cheaply converted into cash. 
B)  The demand for a bond declines when it becomes less liquid, decreasing the interest rate spread between it and relatively more liquid bonds. 
C)  The differences in bond interest rates reflect differences in default risk only. 
D)  The corporate bond market is the most liquid bond market. 
A)  A liquid asset is one that can be quickly and cheaply converted into cash. 
B)  The demand for a bond declines when it becomes less liquid, decreasing the interest rate spread between it and relatively more liquid bonds. 
C)  The differences in bond interest rates reflect differences in default risk only. 
D)  The corporate bond market is the most liquid bond market.

Question 15

Everything else held constant, if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future, the interest rate on corporate bonds will ________ and the interest rate on government securities will ________.

Accepted Answer

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

Question 16

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

Question 17

Demonstrate graphically and explain how a reduction in default risk affects the demand or supply of corporate and Canada bonds.

Accepted Answer

A reduction of default risk increases th

Question 18

-The mound-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 moderately in the near-term and rise later on 
C)  rise moderately in the near-term and fall later on 
D)  remain unchanged in the near-term and rise later on 
A)  remain constant in the near-term and fall later on 
B)  fall moderately in the near-term and rise later on 
C)  rise moderately in the near-term and fall later on 
D)  remain unchanged in the near-term and rise later on

Question 19

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 
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 20

Based on default risk, which bonds are called: a. "investment grade", b. "junk bonds" or "speculative-grade", and c. "fallen angels"?

Accepted Answer

a. Investment grade are the bonds that h

Exam 6: The Risk and Term Structure of Interest Rates

According to the liquidity premium theory of the term structure ________.

If bonds with different maturities are perfect substitutes, then the ________ on these bonds must be equal.

Bonds with relatively low risk of default are called ________.

When interest rates on 1-2-3-4-5 year bonds are 2.0, 2.1, 2.3, 2.4, and 2.5 percent respectively, what information do we derive on future economic growth and real output?

The interest rate on tax-exempt bonds falls relative to the interest rate on U.S. Treasury securities when ________.

Which of the following statements is true?

According to the liquidity premium theory of the term structure, a flat yield curve indicates that short-term interest rates are expected to ________.

An inverted yield curve predicts that short-term interest rates ________.

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 ________.

As their relative riskiness ________, the equilibrium price of corporate bonds ________ relative to the expected return on default-free bonds, everything else held constant.

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

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.

A ________ yield curve predicts a future increase in inflation.

Which of the following statements is true?

Everything else held constant, if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future, the interest rate on corporate bonds will ________ and the interest rate on government securities will ________.

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, ________.

Demonstrate graphically and explain how a reduction in default risk affects the demand or supply of corporate and Canada bonds.

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

The collapse of the subprime mortgage market ________.

Based on default risk, which bonds are called: a. "investment grade", b. "junk bonds" or "speculative-grade", and c. "fallen angels"?

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 their relative riskiness , the equilibrium price of corporate bonds relative to the expected return on default-free bonds, everything else held constant.

Everything else held constant, if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future, the interest rate on corporate bonds will and the interest rate on government securities will .