Exam 6: The Risk and Term Structure of Interest Rates

A key assumption in the segmented markets theory is that bonds of different maturities ________.

If you have a very low tolerance for risk, which of the following bonds would you be least likely to hold in your portfolio?

According to the expectations theory of the term structure ________.

Tax-exempt bond interest rates increase relative to corporate bond interest rates when ________.

When yield curves are downward sloping, ________.

The segmented markets theory can explain ________.

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

If income tax rates were lowered, then ________.

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 ________.

When Canada bonds become more liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Canada bonds shifts to the ________.

The term structure of interest rates is ________.

-The steeply upward sloping yield curve in the figure above indicates that ________ interest rates are expected to ________ in the future.

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.

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

If income tax rates were lowered, then ________.

The risk structure of interest rates is ________.

What is the shape of the yield curve when short-term rates are expected to rise sharply in the mid-term and moderately in the long-term?

The ________ of the term structure of interest rates states that the interest rate on a long-term bond will equal the average of short-term interest rates that individuals expect to occur over the life of the long-term bond, and investors have no preference for short-term bonds relative to long-term bonds.

If a corporation begins to suffer large losses, then the default risk on the corporate bond will ________, everything else held constant.

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