Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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 3

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

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 6

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 7

The yield curve indicates a possible future recession if it is

Accepted Answer

A)  upward sloping. 
B)  flat. 
C)  downward sloping. 
D)  none of the above. 
A)  upward sloping. 
B)  flat. 
C)  downward sloping. 
D)  none of the above.

Question 8

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

Accepted Answer

nnThe average of the expected

Question 9

If a positive liquidity premium is included in the formula for the term structure, a downward sloping yield curve is impossible.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

If the government budget deficit rises, explain the impact on the risk premia of corporate bonds.
As the supply of government (risk-free) bonds increases, the yields on those bonds rise, reducing the risk premia for corporate bonds.

Accepted Answer

As the supply of government (r

Question 12

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 13

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

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A)  increase; demand for 
B)  decrease; demand for 
C)  increase; supply of 
D)  decrease; supply of 
A)  increase; demand for 
B)  decrease; demand for 
C)  increase; supply of 
D)  decrease; supply of

Question 15

Ceteris paribus, an increase in the government budget deficit will cause the risk premia on corporate bonds to

Accepted Answer

A)  increase. 
B)  decrease. 
C)  stay the same. 
D)  cannot be determined. 
A)  increase. 
B)  decrease. 
C)  stay the same. 
D)  cannot be determined.

Question 16

, a junk bond has a lower risk premium than other bonds.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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 19

What is the difference between risk and term structure?

Accepted Answer

Risk structure explains differ

Question 20

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.

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

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

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

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

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

Term structure models the yields of bonds with

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?

The yield curve indicates a possible future recession if it is

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

If a positive liquidity premium is included in the formula for the term structure, a downward sloping yield curve is impossible.

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

If the government budget deficit rises, explain the impact on the risk premia of corporate bonds. As the supply of government (risk-free) bonds increases, the yields on those bonds rise, reducing the risk premia for corporate bonds.

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

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

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

Ceteris paribus, an increase in the government budget deficit will cause the risk premia on corporate bonds to

, a junk bond has a lower risk premium than other bonds.

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

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

What is the difference between risk and term structure?

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

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

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