Exam 6: The Risk and Term Structure of Interest Rates

Bonds with no default risk are called

If investors expect interest rates to fall significantly in the future,the yield curve will be inverted. This means that the yield curve has a ________ slope.

According to the expectations theory of the term structure

If the expected path of 1-year interest rates over the next five years is 2 percent,4 percent,1 percent,4 percent,and 3 percent,the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of

If a corporation begins to suffer large losses,then the default risk on the corporate bond will

The term structure of interest rates is

Other things being equal,an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the ________.

When the yield curve is flat or downward-sloping,it suggest that the economy is more likely to enter

If the yield curve has a mild upward slope,the liquidity premium theory (assuming a mild preference for shorter-term bonds)indicates that the market is predicting

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

When yield curves are flat

The Obama administration increased the tax on the top income tax bracket from 35% to 39%. Supply and demand analysis predicts the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds,all else the same.

Which of the following statements is TRUE?

The collapse of the subprime mortgage market

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 ________.

A particularly attractive feature of the ________ is that it tells you what the market is predicting about future short-term interest rates by just looking at the slope of the yield curve.

The spread between the interest rates on Baa corporate bonds and U.S. government bonds is very large during the Great Depression years 1930-1933. Explain this difference using the bond supply and demand analysis.

According to this theory of the term structure,bonds of different maturities are not substitutes for one another.

An increase in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield of Treasury bonds,everything else held constant.

Everything else held constant,an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds,and ________ the demand for U.S. government bonds.