Exam 6: The Risk and Term Structure of Interest Rates

If the yield curve has a mild upward slope,the liquidity premium theory (assuming a mild preference for shorter-term bonds)indicates that the market is predicting

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.

-If investors expect interest rates to fall significantly in the future,the yield curve will be inverted. This means that the yield curve has a ________ slope.

The collapse of the subprime mortgage market

Bonds with relatively high risk of default are called

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 ________ yield curve predicts a future increase in inflation.

An inverted yield curve

During a "flight to quality"

Differences in ________ explain why interest rates on Treasury securities are not all the same.

According to the segmented markets theory of the term structure

-An inverted yield curve predicts that short-term interest rates

If you have a very low tolerance for risk,which of the following bonds would you be least likely to hold in your portfolio?

The preferred habitat theory of the term structure is closely related to the

Which of the following statements are true?

A decrease 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 ________.

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.

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

If 1-year interest rates for the next three years are expected to be 4,2,and 3 percent,and the 3-year term premium is 1 percent,than the 3-year bond rate will be

Bonds with relatively low risk of default are called ________ securities and have a rating of Baa (or BBB)and above; bonds with ratings below Baa (or BBB)have a higher default risk and are called ________.