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

Question 2

Default risk is the risk that ________.

Accepted Answer

A)  a bond issuer is unable to make interest payments 
B)  a bond issuer is unable to make a profit 
C)  a bond issuer is unable to pay the face value at maturity 
D)  Both A and C above 
A)  a bond issuer is unable to make interest payments 
B)  a bond issuer is unable to make a profit 
C)  a bond issuer is unable to pay the face value at maturity 
D)  Both A and C above

Question 3

When yield curves are downward 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

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.

Accepted Answer

A)  steep upward 
B)  slight upward 
C)  flat 
D)  downward 
A)  steep upward 
B)  slight upward 
C)  flat 
D)  downward

Question 5

If a corporation begins to suffer large losses,then the default risk on the corporate bond will ________.

Accepted Answer

A)  increase and the bond's return will become more uncertain, meaning the expected return on the corporate bond will fall 
B)  increase and the bond's return will become less uncertain, meaning the expected return on the corporate bond will fall 
C)  decrease and the bond's return will become less uncertain, meaning the expected return on the corporate bond will fall 
D)  decrease and the bond's return will become less uncertain, meaning the expected return on the corporate bond will rise 
A)  increase and the bond's return will become more uncertain, meaning the expected return on the corporate bond will fall 
B)  increase and the bond's return will become less uncertain, meaning the expected return on the corporate bond will fall 
C)  decrease and the bond's return will become less uncertain, meaning the expected return on the corporate bond will fall 
D)  decrease and the bond's return will become less uncertain, meaning the expected return on the corporate bond will rise

Question 6

According to the expectations theory of the term structure ________.

Accepted Answer

A)  when the yield curve is steeply upward sloping, short-term interest rates are expected to remain relatively stable in the future 
B)  when the yield curve is downward sloping, short-term interest rates are expected to remain relatively stable in the future 
C)  investors have strong preferences for short-term relative to long-term bonds, explaining why yield curves typically slope upward 
D)  yield curves should be equally likely to slope downward as slope upward 
A)  when the yield curve is steeply upward sloping, short-term interest rates are expected to remain relatively stable in the future 
B)  when the yield curve is downward sloping, short-term interest rates are expected to remain relatively stable in the future 
C)  investors have strong preferences for short-term relative to long-term bonds, explaining why yield curves typically slope upward 
D)  yield curves should be equally likely to slope downward as slope upward

Question 7

An increase in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on government securities,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 8

-The steeply upward sloping yield curve in the figure above indicates that ________ interest rates are expected to ________ in the future.

Accepted Answer

A)  short-term; rise 
B)  short-term; fall moderately 
C)  short-term; remain unchanged 
D)  long-term; fall moderately 
A)  short-term; rise 
B)  short-term; fall moderately 
C)  short-term; remain unchanged 
D)  long-term; fall moderately

Question 9

When Canada bonds become more liquid,other things equal,the demand curve for corporate bonds shifts to the ________ and the demand curve for Canada 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 10

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 11

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.

Accepted Answer

A)  average 
B)  sum 
C)  difference 
D)  multiple 
A)  average 
B)  sum 
C)  difference 
D)  multiple

Question 12

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 13

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

Accepted Answer

A)  are not substitutes at all 
B)  are perfect substitutes 
C)  are substitutes only if the investor is given a premium incentive 
D)  are substitutes but not perfect substitutes 
A)  are not substitutes at all 
B)  are perfect substitutes 
C)  are substitutes only if the investor is given a premium incentive 
D)  are substitutes but not perfect substitutes

Question 14

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 ________.

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 15

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.

Question 16

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.

Accepted Answer

A)  segmented markets theory 
B)  expectations theory 
C)  liquidity premium theory 
D)  separable markets theory 
A)  segmented markets theory 
B)  expectations theory 
C)  liquidity premium theory 
D)  separable markets theory

Question 17

Based on default risk,which bonds are called: a."investment grade",b."junk bonds" or "speculative-grade",and c."fallen angels"?

Accepted Answer

a.Investment grade are the bonds that ha

Question 18

When the yield curve is flat or downward-sloping,it suggests 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 19

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 ________.

Accepted Answer

A)  two years 
B)  three years 
C)  four years 
D)  five years 
A)  two years 
B)  three years 
C)  four years 
D)  five years

Question 20

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

Accepted Answer

A)  are expected to rise in the future 
B)  will rise and then fall in the future 
C)  will remain unchanged in the future 
D)  will fall in the future 
A)  are expected to rise in the future 
B)  will rise and then fall in the future 
C)  will remain unchanged in the future 
D)  will fall in the future

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 ________.

Default risk is the risk that ________.

When yield curves are downward sloping,________.

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.

If a corporation begins to suffer large losses,then the default risk on the corporate bond will ________.

According to the expectations theory of the term structure ________.

An increase in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on government securities,everything else held constant.

-The steeply upward sloping yield curve in the figure above indicates that ________ interest rates are expected to ________ in the future.

When Canada bonds become more liquid,other things equal,the demand curve for corporate bonds shifts to the ________ and the demand curve for Canada bonds shifts to the ________.

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 ________.

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.

When yield curves are steeply upward sloping,________.

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

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 ________.

Which of the following statements is true?

Based on default risk,which bonds are called: a."investment grade",b."junk bonds" or "speculative-grade",and c."fallen angels"?

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

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 ________.

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

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behaviour of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Nonbank Finance

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

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

An increase in the riskiness of corporate bonds will the yield on corporate bonds and the yield on government securities,everything else held constant.

-The steeply upward sloping yield curve in the figure above indicates that interest rates are expected to in the future.

When Canada bonds become more liquid,other things equal,the demand curve for corporate bonds shifts to the and the demand curve for Canada bonds shifts to the .