Question 1

A CCC bond has higher interest rate risk than a BBB bond.

Accepted Answer

A) True 
 B)False

Question 2

An increase in expected inflation has an ambiguous effect on the risk premium of corporate bonds.

Accepted Answer

A) True 
 B)False

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.

Question 4

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

Issuing bonds is cheaper so co

Question 5

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

Accepted Answer

The upgrade indicate

Question 6

, a blue chip bond has a lower risk premium than other bonds.

Accepted Answer

A) True 
 B)False

Question 7

If interest rates on one-year bonds are expected to stay at 3% and the term premium is 1%, what would the yield curve look like?

Accepted Answer

The yield

Question 8

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

The questionable solvency increases the

Question 9

Explain the concept of flight to quality.

Accepted Answer

Flight to quality is a concept that desc

Question 10

The yield curve plots yield against maturity.

Accepted Answer

A) True 
 B)False

Question 11

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 12

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 13

If S&P upgrades a corporate bond the _____ for the bond will shift and its risk premium will

Accepted Answer

A)  demand; rise. 
B)  demand; fall. 
C)  supply; rise. 
D)  supply; fall. 
A)  demand; rise. 
B)  demand; fall. 
C)  supply; rise. 
D)  supply; fall.

Question 14

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

Accepted Answer

A)  the risk that the issuer will not make future payments 
B)  differences in the taxation of the bonds 
C)  ease of finding buyers and sellers of a bond 
D)  all of the above 
A)  the risk that the issuer will not make future payments 
B)  differences in the taxation of the bonds 
C)  ease of finding buyers and sellers of a bond 
D)  all of the above

Question 15

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

Accepted Answer

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

Question 16

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 17

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 18

An increase in expected inflation increases the risk premium of corporate bonds.

Accepted Answer

A) True 
 B)False

Question 19

A change in the relative return of a bond affects the bond's risk premium.

Accepted Answer

A) True 
 B)False

Question 20

Ratings from Moody's and S&P measure

Accepted Answer

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

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

A CCC bond has higher interest rate risk than a BBB bond.

An increase in expected inflation has an ambiguous effect on the risk premium of corporate bonds.

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

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.

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

, a blue chip bond has a lower risk premium than other bonds.

If interest rates on one-year bonds are expected to stay at 3% and the term premium is 1%, what would the yield curve look like?

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.

Explain the concept of flight to quality.

The yield curve plots yield against maturity.

Junk bonds tend to have

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?

If S&P upgrades a corporate bond the _____ for the bond will shift and its risk premium will

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

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

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

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

An increase in expected inflation increases the risk premium of corporate bonds.

A change in the relative return of a bond affects the bond's risk premium.

Ratings from Moody's and S&P measure

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.