Question 1

If a higher inflation is expected,what would you expect to happen to the shape of the yield curve? Why?

Accepted Answer

The yield curve should have a steep upwa

Question 2

An inverted yield curve

Accepted Answer

A) slopes up. 
B) is flat. 
C) slopes down. 
D) has a U shape. 
A) slopes up. 
B) is flat. 
C) slopes down. 
D) has a U shape.

Question 3

As their relative riskiness ________,the expected return on corporate bonds ________ relative to the expected return on default-free bonds,everything else held constant.

Accepted Answer

A) increases;increases 
B) increases;decreases 
C) decreases;decreases 
D) decreases;does not change 
A) increases;increases 
B) increases;decreases 
C) decreases;decreases 
D) decreases;does not change

Question 4

Bonds with no default risk are called

Accepted Answer

A) flower bonds. 
B) no-risk bonds. 
C) default-free bonds. 
D) zero-risk bonds. 
A) flower bonds. 
B) no-risk bonds. 
C) default-free bonds. 
D) zero-risk bonds.

Question 5

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

Accepted Answer

A) increases;less 
B) increases;more 
C) decreases;less 
D) decreases;more 
A) increases;less 
B) increases;more 
C) decreases;less 
D) decreases;more

Question 6

-The mound-shaped yield curve in the figure above indicates that short-term interest rates are expected to

Accepted Answer

A) rise in the near-term and fall later on. 
B) fall moderately in the near-term and rise later on. 
C) fall sharply in the near-term and rise later on. 
D) remain unchanged in the near-term and fall later on. 
A) rise in the near-term and fall later on. 
B) fall moderately in the near-term and rise later on. 
C) fall sharply in the near-term and rise later on. 
D) remain unchanged in the near-term and fall later on.

Question 7

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

Accepted Answer

A) one year. 
B) two years. 
C) three years. 
D) four years. 
A) one year. 
B) two years. 
C) three years. 
D) four years.

Question 8

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

Accepted Answer

A) a rise in short-term interest rates in the near future and a decline further out in the future. 
B) constant short-term interest rates in the near future and a decline further out in the future. 
C) a decline in short-term interest rates in the near future and a rise further out in the future. 
D) a decline in short-term interest rates in the near future and an even steeper decline further out in the future. 
A) a rise in short-term interest rates in the near future and a decline further out in the future. 
B) constant short-term interest rates in the near future and a decline further out in the future. 
C) a decline in short-term interest rates in the near future and a rise further out in the future. 
D) a decline in short-term interest rates in the near future and an even steeper decline further out in the future.

Question 9

During the Great Depression years 1930-1933 there was a very high rate of business failures and defaults,we would expect the risk premium for ________ bonds to be very high.

Accepted Answer

A) U.S.Treasury 
B) corporate Aaa 
C) municipal 
D) corporate Baa 
A) U.S.Treasury 
B) corporate Aaa 
C) municipal 
D) corporate Baa

Question 10

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

Accepted Answer

A) increasing;increasing 
B) increasing;decreasing 
C) decreasing;increasing 
D) decreasing;decreasing 
A) increasing;increasing 
B) increasing;decreasing 
C) decreasing;increasing 
D) decreasing;decreasing

Question 11

Which of the following statements are TRUE?

Accepted Answer

A) An increase in tax rates will increase the demand for Treasury bonds,lowering their interest rates. 
B) Because the tax-exempt status of municipal bonds was of little benefit to bond holders when tax rates were low,they had higher interest rates than U.S.government bonds before World War II. 
C) Interest rates on municipal bonds will be higher than comparable bonds without the tax exemption. 
D) Because coupon payments on municipal bonds are exempt from federal income tax,the expected after-tax return on them will be higher for individuals in lower income tax brackets. 
A) An increase in tax rates will increase the demand for Treasury bonds,lowering their interest rates. 
B) Because the tax-exempt status of municipal bonds was of little benefit to bond holders when tax rates were low,they had higher interest rates than U.S.government bonds before World War II. 
C) Interest rates on municipal bonds will be higher than comparable bonds without the tax exemption. 
D) Because coupon payments on municipal bonds are exempt from federal income tax,the expected after-tax return on them will be higher for individuals in lower income tax brackets.

Question 12

The spread between interest rates on low quality corporate bonds and U.S.government bonds

Accepted Answer

A) widened significantly during the Great Depression. 
B) narrowed significantly during the Great Depression. 
C) narrowed moderately during the Great Depression. 
D) did not change during the Great Depression. 
A) widened significantly during the Great Depression. 
B) narrowed significantly during the Great Depression. 
C) narrowed moderately during the Great Depression. 
D) did not change during the Great Depression.

Question 13

Corporate bonds are not as liquid as government bonds because

Accepted Answer

A) fewer corporate bonds for any one corporation are traded,making them more costly to sell. 
B) the corporate bond rating must be calculated each time they are traded. 
C) corporate bonds are not callable. 
D) corporate bonds cannot be resold. 
A) fewer corporate bonds for any one corporation are traded,making them more costly to sell. 
B) the corporate bond rating must be calculated each time they are traded. 
C) corporate bonds are not callable. 
D) corporate bonds cannot be resold.

Question 14

A key assumption in the segmented markets theory is that bonds of different maturities

Accepted Answer

A) are not substitutes at all. 
B) are perfect substitutes. 
C) are substitutes only if the investor is given a premium incentive. 
D) are substitutes but not perfect substitutes. 
A) are not substitutes at all. 
B) are perfect substitutes. 
C) are substitutes only if the investor is given a premium incentive. 
D) are substitutes but not perfect substitutes.

Question 15

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

Accepted Answer

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

Question 16

The term structure of interest rates is

Accepted Answer

A) the relationship among interest rates of different bonds with the same maturity. 
B) the structure of how interest rates move over time. 
C) the relationship among the term to maturity of different bonds. 
D) the relationship among interest rates on bonds with different maturities. 
A) the relationship among interest rates of different bonds with the same maturity. 
B) the structure of how interest rates move over time. 
C) the relationship among the term to maturity of different bonds. 
D) the relationship among interest rates on bonds with different maturities.

Question 17

-The steeply upward sloping yield curve in the figure above indicates that

Accepted Answer

A) short-term interest rates are expected to rise in the future. 
B) short-term interest rates are expected to fall moderately in the future. 
C) short-term interest rates are expected to fall sharply in the future. 
D) short-term interest rates are expected to remain unchanged in the future. 
A) short-term interest rates are expected to rise in the future. 
B) short-term interest rates are expected to fall moderately in the future. 
C) short-term interest rates are expected to fall sharply in the future. 
D) short-term interest rates are expected to remain unchanged in the future.

Question 18

A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium.

Accepted Answer

A) positive;raise 
B) positive;lower 
C) negative;raise 
D) negative;lower 
A) positive;raise 
B) positive;lower 
C) negative;raise 
D) negative;lower

Question 19

Everything else held constant,if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future,the interest rate on corporate bonds will ________ and the interest rate on Treasury securities will ________.

Accepted Answer

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

Question 20

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 ________.

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

Exam 6: The Risk and Term Structure of Interest Rates

If a higher inflation is expected,what would you expect to happen to the shape of the yield curve? Why?

An inverted yield curve

As their relative riskiness ________,the expected return on corporate bonds ________ relative to the expected return on default-free bonds,everything else held constant.

Bonds with no default risk are called

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

-The mound-shaped yield curve in the figure above indicates that short-term interest rates are expected to

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

During the Great Depression years 1930-1933 there was a very high rate of business failures and defaults,we would expect the risk premium for ________ bonds to be very high.

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

Which of the following statements are TRUE?

The spread between interest rates on low quality corporate bonds and U.S.government bonds

Corporate bonds are not as liquid as government bonds because

A key assumption in the segmented markets theory is that bonds of different maturities

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

The term structure of interest rates is

-The steeply upward sloping yield curve in the figure above indicates that

A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium.

Everything else held constant,if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future,the interest rate on corporate bonds will ________ and the interest rate on Treasury securities will ________.

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 ________.

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

Web 1:financial Crises in Emerging Market Economies

Web 2:the Islm Model

Web 3:nonbank Finance

Web 4:financial Derivatives

Web 5:conflicts of Interest in the Financial Services Industry

Filters

As their relative riskiness ,the expected return on corporate bonds relative to the expected return on default-free bonds,everything else held constant.

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

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

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

A bond with default risk will always have a risk premium and an increase in its default risk will the risk premium.

Everything else held constant,if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future,the interest rate on corporate bonds will and the interest rate on Treasury securities will .

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 .