Question 1

The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and are ________ U.S.Treasury bonds.

Accepted Answer

A) less liquid than 
B) less speculative than 
C) tax-exempt unlike 
D) lower-yielding than 
A) less liquid than 
B) less speculative than 
C) tax-exempt unlike 
D) lower-yielding than A

Question 2

An inverted yield curve predicts that short-term interest rates

Accepted Answer

A) are expected to rise in the future. 
B) will rise and then fall in the future. 
C) will remain unchanged in the future. 
D) will fall in the future. 
A) are expected to rise in the future. 
B) will rise and then fall in the future. 
C) will remain unchanged in the future. 
D) will fall in the future. D

Question 3

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

Accepted Answer

A) segmented markets theory 
B) expectations theory 
C) liquidity premium theory 
D) separable markets theory 
A) segmented markets theory 
B) expectations theory 
C) liquidity premium theory 
D) separable markets theory A

Question 4

If 1-year interest rates for the next five years are expected to be 4,2,5,4,and 5 percent,and the 5-year term premium is 1 percent,than the 5-year bond rate will be

Accepted Answer

A) 2 percent. 
B) 3 percent. 
C) 4 percent. 
D) 5 percent. 
A) 2 percent. 
B) 3 percent. 
C) 4 percent. 
D) 5 percent.

Question 5

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

Accepted Answer

A) rise in the future. 
B) remain unchanged in the future. 
C) decline moderately in the future. 
D) decline sharply in the future. 
A) rise in the future. 
B) remain unchanged in the future. 
C) decline moderately in the future. 
D) decline sharply in the future.

Question 6

Economists' attempts to explain the term structure of interest rates

Accepted Answer

A) illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence. 
B) illustrate how economists continue to accept theories that fail to explain observed behavior of interest rate movements. 
C) prove that the real world is a special case that tends to get short shrift in theoretical models. 
D) have proved entirely unsatisfactory to date. 
A) illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence. 
B) illustrate how economists continue to accept theories that fail to explain observed behavior of interest rate movements. 
C) prove that the real world is a special case that tends to get short shrift in theoretical models. 
D) have proved entirely unsatisfactory to date.

Question 7

During a "flight to quality"

Accepted Answer

A) the spread between Treasury bonds and Baa bonds increases. 
B) the spread between Treasury bonds and Baa bonds decreases. 
C) the spread between Treasury bonds and Baa bonds is not affected. 
D) the change in the spread between Treasury bonds and Baa bonds cannot be predicted. 
A) the spread between Treasury bonds and Baa bonds increases. 
B) the spread between Treasury bonds and Baa bonds decreases. 
C) the spread between Treasury bonds and Baa bonds is not affected. 
D) the change in the spread between Treasury bonds and Baa bonds cannot be predicted.

Question 8

When yield curves are steeply upward sloping

Accepted Answer

A) long-term interest rates are above short-term interest rates. 
B) short-term interest rates are above long-term interest rates. 
C) short-term interest rates are about the same as long-term interest rates. 
D) medium-term interest rates are above both short-term and long-term interest rates. 
A) long-term interest rates are above short-term interest rates. 
B) short-term interest rates are above long-term interest rates. 
C) short-term interest rates are about the same as long-term interest rates. 
D) medium-term interest rates are above both short-term and long-term interest rates.

Question 9

When short-term interest rates are expected to fall sharply in the future,the yield curve will

Accepted Answer

A) slope up. 
B) be flat. 
C) be inverted. 
D) be an inverted U shape. 
A) slope up. 
B) be flat. 
C) be inverted. 
D) be an inverted U shape.

Question 10

According to the expectations theory of the term structure

Accepted Answer

A) when the yield curve is steeply upward sloping,short-term interest rates are expected to remain relatively stable in the future. 
B) when the yield curve is downward sloping,short-term interest rates are expected to remain relatively stable in the future. 
C) investors have strong preferences for short-term relative to long-term bonds,explaining why yield curves typically slope upward. 
D) yield curves should be equally likely to slope downward as slope upward. 
A) when the yield curve is steeply upward sloping,short-term interest rates are expected to remain relatively stable in the future. 
B) when the yield curve is downward sloping,short-term interest rates are expected to remain relatively stable in the future. 
C) investors have strong preferences for short-term relative to long-term bonds,explaining why yield curves typically slope upward. 
D) yield curves should be equally likely to slope downward as slope upward.

Question 11

When the Treasury bond market becomes more liquid,other things equal,the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.

Accepted Answer

A) right;right 
B) right;left 
C) left;right 
D) left;left 
A) right;right 
B) right;left 
C) left;right 
D) left;left

Question 12

When yield curves are downward sloping

Accepted Answer

A) long-term interest rates are above short-term interest rates. 
B) short-term interest rates are above long-term interest rates. 
C) short-term interest rates are about the same as long-term interest rates. 
D) medium-term interest rates are above both short-term and long-term interest rates. 
A) long-term interest rates are above short-term interest rates. 
B) short-term interest rates are above long-term interest rates. 
C) short-term interest rates are about the same as long-term interest rates. 
D) medium-term interest rates are above both short-term and long-term interest rates.

Question 13

According to the liquidity premium theory,a yield curve that is flat means that

Accepted Answer

A) bond purchasers expect interest rates to rise in the future. 
B) bond purchasers expect interest rates to stay the same. 
C) bond purchasers expect interest rates to fall in the future. 
D) the yield curve has nothing to do with expectations of bond purchasers. 
A) bond purchasers expect interest rates to rise in the future. 
B) bond purchasers expect interest rates to stay the same. 
C) bond purchasers expect interest rates to fall in the future. 
D) the yield curve has nothing to do with expectations of bond purchasers.

Question 14

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

Accepted Answer

A) municipal bonds 
B) investment-grade bonds 
C) U.S.Treasury bonds 
D) junk bonds 
A) municipal bonds 
B) investment-grade bonds 
C) U.S.Treasury bonds 
D) junk bonds

Question 15

Which of the following statements is TRUE?

Accepted Answer

A) State and local governments cannot default on their bonds. 
B) Bonds issued by state and local governments are called municipal bonds. 
C) All government issued bonds-local,state,and federal-are federal income tax exempt. 
D) The coupon payment on municipal bonds is usually higher than the coupon payment on Treasury bonds. 
A) State and local governments cannot default on their bonds. 
B) Bonds issued by state and local governments are called municipal bonds. 
C) All government issued bonds-local,state,and federal-are federal income tax exempt. 
D) The coupon payment on municipal bonds is usually higher than the coupon payment on Treasury bonds.

Question 16

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

Accepted Answer

A) increase;increase 
B) reduce;reduce 
C) increase;reduce 
D) reduce;increase 
A) increase;increase 
B) reduce;reduce 
C) increase;reduce 
D) reduce;increase

Question 17

If bonds with different maturities are perfect substitutes,then the ________ on these bonds must be equal.

Accepted Answer

A) expected return 
B) surprise return 
C) surplus return 
D) excess return 
A) expected return 
B) surprise return 
C) surplus return 
D) excess return

Question 18

If the expected path of 1-year interest rates over the next five years is 1 percent,2 percent,3 percent,4 percent,and 5 percent,the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of

Accepted Answer

A) two years. 
B) three years. 
C) four years. 
D) five years. 
A) two years. 
B) three years. 
C) four years. 
D) five years.

Question 19

A(n)________ in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds,all else equal.

Accepted Answer

A) increase;increase;decrease 
B) increase;decrease;decrease 
C) decrease;increase;increase 
D) decrease;decrease;decrease 
A) increase;increase;decrease 
B) increase;decrease;decrease 
C) decrease;increase;increase 
D) decrease;decrease;decrease

Question 20

According to the liquidity premium theory of the term structure

Accepted Answer

A) because buyers of bonds may prefer bonds of one maturity over another,interest rates on bonds of different maturities do not move together over time. 
B) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. 
C) because of the positive term premium,the yield curve will not be observed to be downward sloping. 
D) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. 
A) because buyers of bonds may prefer bonds of one maturity over another,interest rates on bonds of different maturities do not move together over time. 
B) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. 
C) because of the positive term premium,the yield curve will not be observed to be downward sloping. 
D) the interest rate for each maturity bond is determined by supply and demand for that maturity bond.

Exam 6: The Risk and Term Structure of Interest Rates

The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and are ________ U.S.Treasury bonds.

An inverted yield curve predicts that short-term interest rates

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

If 1-year interest rates for the next five years are expected to be 4,2,5,4,and 5 percent,and the 5-year term premium is 1 percent,than the 5-year bond rate will be

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

Economists' attempts to explain the term structure of interest rates

During a "flight to quality"

When yield curves are steeply upward sloping

When short-term interest rates are expected to fall sharply in the future,the yield curve will

According to the expectations theory of the term structure

When the Treasury bond market becomes more liquid,other things equal,the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.

When yield curves are downward sloping

According to the liquidity premium theory,a yield curve that is flat means that

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

Which of the following statements is TRUE?

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

If bonds with different maturities are perfect substitutes,then the ________ on these bonds must be equal.

If the expected path of 1-year interest rates over the next five years is 1 percent,2 percent,3 percent,4 percent,and 5 percent,the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of

A(n)________ in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds,all else equal.

According to the liquidity premium theory of the term structure

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behavior of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Central Banks and the Federal Reserve System

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory, inflation, and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

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When the Treasury bond market becomes more liquid,other things equal,the demand curve for corporate bonds shifts to the and the demand curve for Treasury bonds shifts to the .

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

A(n) in the liquidity of corporate bonds will the price of corporate bonds and the yield on corporate bonds,all else equal.