Question 1

An AAA bond has lower default risk than a BBB bond.

Accepted Answer

A) True 
 B)False

Question 2

Term structure models the yields of bonds with

Accepted Answer

A)  with the same times to maturity. 
B)  with different times to maturity. 
C)  both of the above. 
D)  neither of the above. 
A)  with the same times to maturity. 
B)  with different times to maturity. 
C)  both of the above. 
D)  neither of the above.

Question 3

Ceteris paribus, a junk bond has a higher yield and higher risk premium than other bonds.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A)  default risk 
B)  interest rate risk 
C)  credit risk 
D)  all of the above 
A)  default risk 
B)  interest rate risk 
C)  credit risk 
D)  all of the above

Question 5

The yield on a one-year bond is currently 3% and the expected yield for the next three years is also 3%. If the term premium is 0.5, then the yield curve

Accepted Answer

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

Question 6

If Congress removed the tax exemption for municipal bonds, how would the risk premium on those bonds be affected? Use a graph to help explain.

Accepted Answer

@#IMG-DLM& The loss of the tax exemption reduces t

Question 7

The yield on a one-year bond is currently 4% and the expected yield on one-year bonds for the next two years is 5% and 6%. If the liquidity premium is 0.5%, what is the yield on a bond with two years to maturity?

Accepted Answer

A)  4.5% 
B)  5% 
C)  5.5% 
D)  6% 
A)  4.5% 
B)  5% 
C)  5.5% 
D)  6%

Question 8

If a company gets concessions from labor in union negotiations, one would expect a(n) _____ in the risk premia on its bonds due to an increase in

Accepted Answer

A)  increase; default risk. 
B)  decrease; default risk. 
C)  increase; liquidity. 
D)  decrease; liquidity. 
A)  increase; default risk. 
B)  decrease; default risk. 
C)  increase; liquidity. 
D)  decrease; liquidity.

Question 9

If Moody's upgrades a corporate bond to AAA, explain the impact on the risk premium.

Accepted Answer

The upgrade indicate

Question 10

The use of auctions should make the cost of issuing bonds cheaper for corporations. Show the expected impact on risk premia for corporate bonds with a graph.

Accepted Answer

@#IMG-DLM& Issuing bonds is cheaper so c

Question 11

A two-year bond is a perfect substitute for two consecutive one-year bonds.

Accepted Answer

A) True 
 B)False

Question 12

The yield curve plots yield against maturity.

Accepted Answer

A) True 
 B)False

Question 13

A strike against United Airlines puts the company's long term solvency in question. Using a graph, show (and explain) the effect on its risk premium.

Accepted Answer

@#IMG-DLM& The questionable solvency increases the

Question 14

Municipal bonds tend to have lower yields than other bonds, ceteris paribus, due to

Accepted Answer

A)  higher default risk. 
B)  higher taxes. 
C)  higher liquidity. 
D)  none of the above. 
A)  higher default risk. 
B)  higher taxes. 
C)  higher liquidity. 
D)  none of the above.

Question 15

A blue chip bond has greater default risk than a high yield corporate bond.

Accepted Answer

A) True 
 B)False

Question 16

If the government budget deficit rises, explain the impact on the risk premia of corporate bonds.

Accepted Answer

As the supply of government (r

Question 17

Which theory that suggests short and long term bonds are partial substitutes?

Accepted Answer

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

Question 18

The yield on a one-year bond is currently 5% and the liquidity premium is 0.5(n-1)% where n is the years to maturity. You are told that the spread between two- and one-year bonds is positive. What does that tell you about the yield on the two-year bond?

Accepted Answer

The yield on the two

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Ceteris paribus, an AAA bond has a lower term premium than other bonds.

Accepted Answer

A) True 
 B)False

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

An AAA bond has lower default risk than a BBB bond.

Term structure models the yields of bonds with

Ceteris paribus, a junk bond has a higher yield and higher risk premium than other bonds.

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

The yield on a one-year bond is currently 3% and the expected yield for the next three years is also 3%. If the term premium is 0.5, then the yield curve

If Congress removed the tax exemption for municipal bonds, how would the risk premium on those bonds be affected? Use a graph to help explain.

The yield on a one-year bond is currently 4% and the expected yield on one-year bonds for the next two years is 5% and 6%. If the liquidity premium is 0.5%, what is the yield on a bond with two years to maturity?

If a company gets concessions from labor in union negotiations, one would expect a(n) _____ in the risk premia on its bonds due to an increase in

If Moody's upgrades a corporate bond to AAA, explain the impact on the risk premium.

The use of auctions should make the cost of issuing bonds cheaper for corporations. Show the expected impact on risk premia for corporate bonds with a graph.

A two-year bond is a perfect substitute for two consecutive one-year bonds.

The yield curve plots yield against maturity.

A strike against United Airlines puts the company's long term solvency in question. Using a graph, show (and explain) the effect on its risk premium.

Municipal bonds tend to have lower yields than other bonds, ceteris paribus, due to

A blue chip bond has greater default risk than a high yield corporate bond.

If the government budget deficit rises, explain the impact on the risk premia of corporate bonds.

Which theory that suggests short and long term bonds are partial substitutes?

The yield on a one-year bond is currently 5% and the liquidity premium is 0.5(n-1)% where n is the years to maturity. You are told that the spread between two- and one-year bonds is positive. What does that tell you about the yield on the two-year bond?

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

Ceteris paribus, an AAA bond has a lower term premium than other bonds.

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

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