Exam 6: The Risk and Term Structure of Interest Rates

When yield curves are steeply upward sloping, ________.

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

If the yield curve is flat for short maturities and then slopes downward for longer maturities, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting ________.

Bonds with relatively high risk of default are called ________.

The spread between interest rates on low quality corporate bonds and Canada bonds ________.

When the yield curve is flat or downward-sloping, it suggests that the economy is more likely to enter ________.

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.

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 ________.

Three factors explain the risk structure of interest rates: ________.

-The steeply upward sloping yield curve in the figure above indicates that ________.

An increase in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the interest rate on those corporate bonds, everything else held constant.

Typically, yield curves are ________.

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

What is the shape of the yield curve when short rates are expected to fall in the medium term, and then increase? Demonstrate this graphically.

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

During a "flight to quality" ________.

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 ________.

Canadian government bonds have no default risk because ________.

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

If the yield curve slope is flat for short maturities and then slopes steeply upward for longer maturities, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting ________.