Question 1

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

Accepted Answer

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

Question 2

Which of the following statements is true?

Accepted Answer

A)  A liquid asset is one that can be quickly and cheaply converted into cash. 
B)  The demand for a bond declines when it becomes less liquid, decreasing the interest rate spread between it and relatively more liquid bonds. 
C)  The differences in bond interest rates reflect differences in default risk only. 
D)  The corporate bond market is the most liquid bond market. 
A)  A liquid asset is one that can be quickly and cheaply converted into cash. 
B)  The demand for a bond declines when it becomes less liquid, decreasing the interest rate spread between it and relatively more liquid bonds. 
C)  The differences in bond interest rates reflect differences in default risk only. 
D)  The corporate bond market is the most liquid bond market. A

Question 3

Everything else held constant,the interest rate on municipal bonds rises relative to the interest rate on Treasury securities when

Accepted Answer

A)  income tax rates are lowered. 
B)  income tax rates are raised. 
C)  municipal bonds become more widely traded. 
D)  corporate bonds become riskier. 
A)  income tax rates are lowered. 
B)  income tax rates are raised. 
C)  municipal bonds become more widely traded. 
D)  corporate bonds become riskier. A

Question 4

-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 5

When yield curves are flat,

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 6

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

Accepted Answer

A)  a recession. 
B)  an expansion. 
C)  a boom time. 
D)  a period of increasing output. 
A)  a recession. 
B)  an expansion. 
C)  a boom time. 
D)  a period of increasing output.

Question 7

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 8

-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 9

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 10

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 11

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 ________.

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

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 13

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

Accepted Answer

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

Question 14

The segmented markets theory can explain

Accepted Answer

A)  why yield curves usually tend to slope upward. 
B)  why interest rates on bonds of different maturities tend to move together. 
C)  why yield curves tend to slope upward when short-term interest rates are low and to be inverted when short-term interest rates are high. 
D)  why yield curves have been used to forecast business cycles. 
A)  why yield curves usually tend to slope upward. 
B)  why interest rates on bonds of different maturities tend to move together. 
C)  why yield curves tend to slope upward when short-term interest rates are low and to be inverted when short-term interest rates are high. 
D)  why yield curves have been used to forecast business cycles.

Question 15

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 16

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 ________.

Accepted Answer

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

Question 17

Everything else held constant,if the tax-exempt status of municipal bonds were eliminated,then

Accepted Answer

A)  the interest rates on municipal bonds would still be less than the interest rate on Treasury bonds. 
B)  the interest rate on municipal bonds would equal the rate on Treasury bonds. 
C)  the interest rate on municipal bonds would exceed the rate on Treasury bonds. 
D)  the interest rates on municipal, Treasury, and corporate bonds would all increase. 
A)  the interest rates on municipal bonds would still be less than the interest rate on Treasury bonds. 
B)  the interest rate on municipal bonds would equal the rate on Treasury bonds. 
C)  the interest rate on municipal bonds would exceed the rate on Treasury bonds. 
D)  the interest rates on municipal, Treasury, and corporate bonds would all increase.

Question 18

If the expected path of 1-year interest rates over the next four years is 5 percent,4 percent,2 percent,and 1 percent,then the expectations theory predicts that today's interest rate on the four-year bond is

Accepted Answer

A)  1 percent. 
B)  2 percent. 
C)  3 percent. 
D)  4 percent. 
A)  1 percent. 
B)  2 percent. 
C)  3 percent. 
D)  4 percent.

Question 19

According to the expectations theory of the term structure

Accepted Answer

A)  the interest rate on long-term bonds will exceed the average of short-term interest rates that people expect to occur over the life of the long-term bonds, because of their preference for short-term securities. 
B)  interest rates on bonds of different maturities move together over time. 
C)  buyers of bonds prefer short-term to long-term bonds. 
D)  buyers require an additional incentive to hold long-term bonds. 
A)  the interest rate on long-term bonds will exceed the average of short-term interest rates that people expect to occur over the life of the long-term bonds, because of their preference for short-term securities. 
B)  interest rates on bonds of different maturities move together over time. 
C)  buyers of bonds prefer short-term to long-term bonds. 
D)  buyers require an additional incentive to hold long-term bonds.

Question 20

The risk structure of interest rates is

Accepted Answer

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

Exam 6: The Risk and Term Structure of Interest Rates

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

Which of the following statements is true?

Everything else held constant,the interest rate on municipal bonds rises relative to the interest rate on Treasury securities when

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

When yield curves are flat,

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

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

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

The term structure of interest rates is

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 ________.

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

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

The segmented markets theory can explain

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

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 ________.

Everything else held constant,if the tax-exempt status of municipal bonds were eliminated,then

If the expected path of 1-year interest rates over the next four years is 5 percent,4 percent,2 percent,and 1 percent,then the expectations theory predicts that today's interest rate on the four-year bond is

According to the expectations theory of the term structure

The risk structure of interest rates is

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding 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

Financial Crises

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

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

The ISLM Model

Filters

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

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 .

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

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

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 .