Question 1

According to the liquidity premium theory of the term structure

Accepted Answer

A)  because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time. 
B)  the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. 
C)  because of the positive term premium, the yield curve will not be observed to be downward sloping. 
D)  the interest rate for each maturity bond is determined by supply and demand for that maturity bond. 
A)  because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time. 
B)  the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. 
C)  because of the positive term premium, the yield curve will not be observed to be downward sloping. 
D)  the interest rate for each maturity bond is determined by supply and demand for that maturity bond.

Question 2

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 3

When yield curves are steeply upward sloping,

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 4

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 ________.

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 5

An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds,everything else held constant.

Accepted Answer

A)  increase; increase 
B)  reduce; reduce 
C)  reduce; increase 
D)  increase; reduce 
A)  increase; increase 
B)  reduce; reduce 
C)  reduce; increase 
D)  increase; reduce

Question 6

Which of the following statements are true?

Accepted Answer

A)  A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. 
B)  The expected return on corporate bonds decreases as default risk increases. 
C)  A corporate bond's return becomes less uncertain as default risk increases. 
D)  As their relative riskiness increases, the expected return on corporate bonds increases relative to the expected return on default-free bonds. 
A)  A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. 
B)  The expected return on corporate bonds decreases as default risk increases. 
C)  A corporate bond's return becomes less uncertain as default risk increases. 
D)  As their relative riskiness increases, the expected return on corporate bonds increases relative to the expected return on default-free bonds.

Question 7

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 8

According to the segmented markets theory of the term structure

Accepted Answer

A)  bonds of one maturity are close substitutes for bonds of other maturities, therefore, interest rates on bonds of different maturities move together over time. 
B)  the interest rate for each maturity bond is determined by supply and demand for that maturity bond. 
C)  investors' strong preferences for short-term relative to long-term bonds explains why yield curves typically slope downward. 
D)  because of the positive term premium, the yield curve will not be observed to be downward-sloping. 
A)  bonds of one maturity are close substitutes for bonds of other maturities, therefore, interest rates on bonds of different maturities move together over time. 
B)  the interest rate for each maturity bond is determined by supply and demand for that maturity bond. 
C)  investors' strong preferences for short-term relative to long-term bonds explains why yield curves typically slope downward. 
D)  because of the positive term premium, the yield curve will not be observed to be downward-sloping.

Question 9

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

Accepted Answer

A)  increase; increase 
B)  reduce; reduce 
C)  reduce; increase 
D)  increase; reduce 
A)  increase; increase 
B)  reduce; reduce 
C)  reduce; increase 
D)  increase; reduce

Question 10

The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and are ________ U.S.Treasury bonds.

Accepted Answer

A)  less liquid than 
B)  less speculative than 
C)  tax-exempt unlike 
D)  lower-yielding than 
A)  less liquid than 
B)  less speculative than 
C)  tax-exempt unlike 
D)  lower-yielding than

Question 11

The risk that interest payments will not be made,or that the face value of a bond is not repaid when a bond matures is

Accepted Answer

A)  interest rate risk. 
B)  inflation risk. 
C)  moral hazard. 
D)  default risk. 
A)  interest rate risk. 
B)  inflation risk. 
C)  moral hazard. 
D)  default risk.

Question 12

The additional incentive that the purchaser of a Treasury security requires to buy a long-term security rather than a short-term security is called the

Accepted Answer

A)  risk premium. 
B)  term premium. 
C)  tax premium. 
D)  market premium. 
A)  risk premium. 
B)  term premium. 
C)  tax premium. 
D)  market premium.

Question 13

Economists' attempts to explain the term structure of interest rates

Accepted Answer

A)  illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence. 
B)  illustrate how economists continue to accept theories that fail to explain observed behavior of interest rate movements. 
C)  prove that the real world is a special case that tends to get short shrift in theoretical models. 
D)  have proved entirely unsatisfactory to date. 
A)  illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence. 
B)  illustrate how economists continue to accept theories that fail to explain observed behavior of interest rate movements. 
C)  prove that the real world is a special case that tends to get short shrift in theoretical models. 
D)  have proved entirely unsatisfactory to date.

Question 14

When the Treasury bond market becomes more liquid,other things equal,the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts 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 15

An increase in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield of Treasury bonds,everything else held constant.

Accepted Answer

A)  increase; increase 
B)  reduce; reduce 
C)  increase; reduce 
D)  reduce; increase 
A)  increase; increase 
B)  reduce; reduce 
C)  increase; reduce 
D)  reduce; increase

Question 16

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 17

The expectations theory and the segmented markets theory do not explain the facts very well,but they provide the groundwork for the most widely accepted theory of the term structure of interest rates,

Accepted Answer

A)  the Keynesian theory. 
B)  separable markets theory. 
C)  liquidity premium theory. 
D)  the asset market approach. 
A)  the Keynesian theory. 
B)  separable markets theory. 
C)  liquidity premium theory. 
D)  the asset market approach.

Question 18

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

Question 19

Everything else held constant,abolishing all taxes will

Accepted Answer

A)  increase the interest rate on corporate bonds. 
B)  reduce the interest rate on municipal bonds. 
C)  increase the interest rate on municipal bonds. 
D)  increase the interest rate on Treasury bonds. 
A)  increase the interest rate on corporate bonds. 
B)  reduce the interest rate on municipal bonds. 
C)  increase the interest rate on municipal bonds. 
D)  increase the interest rate on Treasury bonds.

Question 20

Everything else held constant,an increase 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

Exam 6: The Risk and Term Structure of Interest Rates

According to the liquidity premium theory of the term structure

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

When yield curves are steeply upward sloping,

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 price of corporate bonds and ________ the price of Treasury bonds,everything else held constant.

Which of the following statements are true?

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.

According to the segmented markets theory of the term structure

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

The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and are ________ U.S.Treasury bonds.

The risk that interest payments will not be made,or that the face value of a bond is not repaid when a bond matures is

The additional incentive that the purchaser of a Treasury security requires to buy a long-term security rather than a short-term security is called the

Economists' attempts to explain the term structure of interest rates

When the Treasury bond market becomes more 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 liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield of Treasury bonds,everything else held constant.

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 ________.

The expectations theory and the segmented markets theory do not explain the facts very well,but they provide the groundwork for the most widely accepted theory of the term structure of interest rates,

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

Everything else held constant,abolishing all taxes will

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

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

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 price of corporate bonds and the price of Treasury bonds,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 price of corporate bonds and the price of Treasury bonds,everything else held constant.

When the Treasury bond market becomes more 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 liquidity of corporate bonds will the price of corporate bonds and the yield of Treasury bonds,everything else held constant.

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 .

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