Exam 6: The Risk and Term Structure of Interest Rates

A decrease in default risk on corporate bonds ________ the demand for these bonds,and ________ the demand for default-free bonds,everything else held constant.

Which of the following bonds are considered to be default-risk free?

According to the liquidity premium theory of the term structure

Use the following figure to answer the question : -The steeply upward sloping yield curve in the figure above indicates that ________ interest rates are expected to ________ in the future.

As default risk increases,the expected return on corporate bonds ________,and the return becomes ________ uncertain,everything else held constant.

According to the expectations theory of the term structure,the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond.

As default risk decreases,the expected return on corporate bonds ________,and the return becomes ________ uncertain,everything else held constant.

An increase in the liquidity of corporate bonds,other things being equal,shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________.

A decrease in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities,everything else held constant.

If the yield curve slope is flat for short maturities and then slopes steeply upward for longer maturities,the liquidity premium theory (assuming a mild preference for shorter-term bonds)indicates that the market is predicting

An increase in default risk on corporate bonds ________ the demand for these bonds,but ________ the demand for default-free bonds,everything else held constant.

According to the liquidity premium theory of the term structure,a flat yield curve indicates that short-term interest rates are expected to

According to the expectations theory of the term structure

A ________ yield curve predicts a future increase in inflation.

Other things being equal,a decrease 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 ________.

If 1-year interest rates for the next three years are expected to be 1,1,and 1 percent,and the 3-year term premium is 1 percent,than the 3-year bond rate will be

The ________ of the term structure states the following: the interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of the long-term bond plus a term premium that responds to supply and demand conditions for that bond.

Use the following figure to answer the question : -The steeply upward sloping yield curve in the figure above indicates that

According to the segmented markets theory of the term structure

Risk premiums on corporate bonds tend to ________ during business cycle expansions and ________ during recessions,everything else held constant.