Exam 6: The Risk and Term Structure of Interest Rates

Over the next three years,the expected path of 1-year interest rates is 4,1,and 1 percent.The expectations theory of the term structure predicts that the current interest rate on 3-year bond is

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.

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 ________.

The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S.Treasury bonds.This is due to

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 ________ of the term structure of interest rates states that the interest rate on a long-term bond will equal the average of short-term interest rates that individuals expect to occur over the life of the long-term bond,and investors have no preference for short-term bonds relative to long-term bonds.

A particularly attractive feature of the ________ is that it tells you what the market is predicting about future short-term interest rates by just looking at the slope of the yield curve.

Municipal bonds have default risk,yet their interest rates are lower than the rates on default-free Treasury bonds.This suggests that

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

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.

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

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

U)S.government bonds have no default risk because

If the expected path of one-year interest rates over the next five years is 4 percent,5 percent,7 percent,8 percent,and 6 percent,then the expectations theory predicts that today's interest rate on the five-year bond is

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

Corporate bonds are not as liquid as government bonds because

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

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

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

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