Exam 6: The Risk and Term Structure of Interest Rates

Three factors explain the risk structure of interest rates

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

The typical shape for a yield curve is

The spread between the interest rates on bonds with default risk and default-free bonds is called the

A ________ yield curve predicts a future increase in inflation.

According to the segmented markets theory of the term structure

When yield curves are flat

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 ________.

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 ________.

U.S.government bonds have no default risk because

When the Treasury bond market becomes less 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 riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities,everything else held constant.

-The mound-shaped yield curve in the figure above indicates that the inflation rate is expected to

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

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.

Which of the following statements is TRUE?

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.

If the federal government where to raise the income tax rates,would this have any impact on a state's cost of borrowing funds? Explain.

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

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