Question 1

The liquidity premium is included in calculations of the yield curve to account for default risk.

Accepted Answer

A) True 
 B)False  False

Question 2

Does the information in the table about the yield curve indicate a possible recession?

Accepted Answer

The yield curve is downward sloping, which does indicate a coming recession.

Question 3

If a corporate bond becomes traded on an exchange (as opposed to OTC), the demand for the bond shifts to the _____ and its risk premia

Accepted Answer

A)  right; rises. 
B)  right; falls. 
C)  left; rises. 
D)  left; falls. 
A)  right; rises. 
B)  right; falls. 
C)  left; rises. 
D)  left; falls. B

Question 4

Positive spreads (long term rates - short term rates) indicate a possible future recession.

Accepted Answer

A) True 
 B)False

Question 5

Interest rate risk is measured by the

Accepted Answer

A)  term premium. 
B)  risk premium. 
C)  rate of inflation. 
D)  none of the above. 
A)  term premium. 
B)  risk premium. 
C)  rate of inflation. 
D)  none of the above.

Question 6

Explain the concept of flight to quality.

Accepted Answer

Flight to quality is a concept that desc

Question 7

You cannot post-dict the changes in rank order between different types of bonds.

Accepted Answer

A) True 
 B)False

Question 8

The current and expected future yields on the one year Treasury bond is 7%. The liquidity premium is 0.5(n-1), where n is the number years to maturity on the bond. Sketch the yield curve covering the next four years. Briefly explain your work.

Accepted Answer

@#IMG-DLM& The average of the expected f

Question 9

A change in the profit opportunities of a company affects the risk premium of that company's bonds.

Accepted Answer

A) True 
 B)False

Question 10

A downward sloping yield curve indicates a possible future recession.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following factors could explain difference in yields on bonds with the same time to maturity?

Accepted Answer

A)  default risk 
B)  tax considerations 
C)  liquidity 
D)  all of the above 
A)  default risk 
B)  tax considerations 
C)  liquidity 
D)  all of the above

Question 12

Explain the liquidity preference and its impact on the yield curve.

Accepted Answer

This theory stresses that inve

Question 13

Junk bonds tend to have

Accepted Answer

A)  higher risk premia. 
B)  higher yields. 
C)  higher default risk. 
D)  all of the above. 
A)  higher risk premia. 
B)  higher yields. 
C)  higher default risk. 
D)  all of the above.

Question 14

Which theory that suggests that investors typically prefer more liquid, shorter-term bonds?

Accepted Answer

A)  preferred habitat. 
B)  the yield curve. 
C)  liquidity preference. 
D)  none of the above. 
A)  preferred habitat. 
B)  the yield curve. 
C)  liquidity preference. 
D)  none of the above.

Question 15

The yield on a one-year bond is currently 6% and the expected yield on one-year bonds for the next three years is 4%, 2% and 1%. If the liquidity premium is 1%, what are the yields on a bond with two, three and four years to maturity?

Accepted Answer

The yield on the two-year bond

Question 16

Structure of interest rates explains why bonds issued by _____ but of _____ sometimes have different yields.

Accepted Answer

A)  the same economic entity, different maturities 
B)  different economic entities, the same maturities 
C)  different economic entities, different maturities 
D)  none of the above. 
A)  the same economic entity, different maturities 
B)  different economic entities, the same maturities 
C)  different economic entities, different maturities 
D)  none of the above.

Question 17

If yields on one-year bonds are expected to fall and the liquidity premium increases with the time to maturity, the yield curve

Accepted Answer

A)  will be upward sloping. 
B)  will be flat. 
C)  will be downward sloping. 
D)  cannot be determined. 
A)  will be upward sloping. 
B)  will be flat. 
C)  will be downward sloping. 
D)  cannot be determined.

Question 18

Government bonds are more liquid than corporate bonds.

Accepted Answer

A) True 
 B)False

Question 19

If yields on one-year bonds are expected to rise and the liquidity premium is zero, the yield curve will be

Accepted Answer

A)  upward sloping. 
B)  flat. 
C)  downward sloping. 
D)  cannot be determined. 
A)  upward sloping. 
B)  flat. 
C)  downward sloping. 
D)  cannot be determined.

Question 20

During crises, flight to quality, investors are driven to sell riskier assets and move to safe ones.

Accepted Answer

A) True 
 B)False

Exam 6: The Economics of Interest-Rate Spreads and Yield Curves

The liquidity premium is included in calculations of the yield curve to account for default risk.

Does the information in the table about the yield curve indicate a possible recession?

If a corporate bond becomes traded on an exchange (as opposed to OTC), the demand for the bond shifts to the _____ and its risk premia

Positive spreads (long term rates - short term rates) indicate a possible future recession.

Interest rate risk is measured by the

Explain the concept of flight to quality.

You cannot post-dict the changes in rank order between different types of bonds.

The current and expected future yields on the one year Treasury bond is 7%. The liquidity premium is 0.5(n-1), where n is the number years to maturity on the bond. Sketch the yield curve covering the next four years. Briefly explain your work.

A change in the profit opportunities of a company affects the risk premium of that company's bonds.

A downward sloping yield curve indicates a possible future recession.

Which of the following factors could explain difference in yields on bonds with the same time to maturity?

Explain the liquidity preference and its impact on the yield curve.

Junk bonds tend to have

Which theory that suggests that investors typically prefer more liquid, shorter-term bonds?

The yield on a one-year bond is currently 6% and the expected yield on one-year bonds for the next three years is 4%, 2% and 1%. If the liquidity premium is 1%, what are the yields on a bond with two, three and four years to maturity?

Structure of interest rates explains why bonds issued by _____ but of _____ sometimes have different yields.

If yields on one-year bonds are expected to fall and the liquidity premium increases with the time to maturity, the yield curve

Government bonds are more liquid than corporate bonds.

If yields on one-year bonds are expected to rise and the liquidity premium is zero, the yield curve will be

During crises, flight to quality, investors are driven to sell riskier assets and move to safe ones.

The Financial System

Money

Interest Rates

The Economics of Interest-Rate Fluctuations

Rational Expectations, Efficient Markets, and the Valuation of Corporate Equities

Financial Structure, Transaction Costs, and Asymmetric Information

Bank Management

Innovation and Structure in Banking and Finance

The Economics of Financial Regulation

Financial Derivatives

Financial Crises: Causes and Consequences

Central Bank Form and Function

The Money Supply Process and the Money Multipliers

Monetary Policy Tools

Monetary Policy Targets and Goals

Foreign Exchange

International Monetary Regimes

Money Demand

Is-Lm

Is-Lm in Action

Aggregate Supply and Demand and the Growth Diamond

Monetary Policy Transmission Mechanisms

Inflation and Money

Rational Expectations Redux: Monetary Policy Implications

Filters

Structure of interest rates explains why bonds issued by _ but of _ sometimes have different yields.