Question 1

Risk premiums on corporate bonds tend to ________ during business cycle expansions and ________ during recessions,everything else held constant.

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 2

What is the shape of the yield curve when short rates are expected to fall in the medium term,and then increase? Demonstrate this graphically.

Accepted Answer

The curve will have

Question 3

Which of the following statements is true?

Accepted Answer

A)  Because coupon payments on tax-exempt bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in higher income tax brackets. 
B)  An increase in tax rates will decrease the demand for tax-exempt bonds, lowering their interest rates. 
C)  Interest rates on tax-exempt bonds will be higher than comparable bonds without the tax exemption. 
D)  Because coupon payments on tax-exempt are exempt from federal income tax, the expected after-tax return on them will be lower for individuals in higher income tax brackets. 
A)  Because coupon payments on tax-exempt bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in higher income tax brackets. 
B)  An increase in tax rates will decrease the demand for tax-exempt bonds, lowering their interest rates. 
C)  Interest rates on tax-exempt bonds will be higher than comparable bonds without the tax exemption. 
D)  Because coupon payments on tax-exempt are exempt from federal income tax, the expected after-tax return on them will be lower for individuals in higher income tax brackets.

Question 4

Tax-exempt bond interest rates increase relative to corporate bond interest rates when ________.

Accepted Answer

A)  income taxes are increased 
B)  corporate bonds become riskier 
C)  U.S. Treasury securities become more widely traded 
D)  there is a major default in the tax-exempt bond market 
A)  income taxes are increased 
B)  corporate bonds become riskier 
C)  U.S. Treasury securities become more widely traded 
D)  there is a major default in the tax-exempt bond market

Question 5

Bonds with no default risk are called ________.

Accepted Answer

A)  flower bonds 
B)  no-risk bonds 
C)  default-free bonds 
D)  zero-risk bonds 
A)  flower bonds 
B)  no-risk bonds 
C)  default-free bonds 
D)  zero-risk bonds

Question 6

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 7

Typically,yield curves are ________.

Accepted Answer

A)  gently upward sloping 
B)  mound shaped 
C)  flat 
D)  bowl shaped 
A)  gently upward sloping 
B)  mound shaped 
C)  flat 
D)  bowl shaped

Question 8

Which of the following securities has the lowest interest rate?

Accepted Answer

A)  Junk bonds 
B)  Canada bonds 
C)  Investment-grade bonds 
D)  Corporate Baa bonds 
A)  Junk bonds 
B)  Canada bonds 
C)  Investment-grade bonds 
D)  Corporate Baa bonds

Question 9

If 1-year interest rates for the next five years are expected to be 4,2,5,4,and 5 percent,and the 5-year term premium is 1 percent,than the 5-year bond rate will be ________.

Accepted Answer

A)  2 percent 
B)  3 percent 
C)  4 percent 
D)  5 percent 
A)  2 percent 
B)  3 percent 
C)  4 percent 
D)  5 percent

Question 10

The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and are ________ Canada 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

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.

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 12

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

Accepted Answer

A)  rise in the future 
B)  remain unchanged in the future 
C)  decline moderately in the future 
D)  decline sharply in the future 
A)  rise in the future 
B)  remain unchanged in the future 
C)  decline moderately in the future 
D)  decline sharply in the future

Question 13

Three factors explain the risk structure of interest rates: ________.

Accepted Answer

A)  liquidity, default risk, and the income tax treatment of a security 
B)  maturity, default risk, and the income tax treatment of a security 
C)  maturity, liquidity, and the income tax treatment of a security 
D)  maturity, default risk, and the liquidity of a security 
A)  liquidity, default risk, and the income tax treatment of a security 
B)  maturity, default risk, and the income tax treatment of a security 
C)  maturity, liquidity, and the income tax treatment of a security 
D)  maturity, default risk, and the liquidity of a security

Question 14

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 15

-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 16

Corporate bonds are not as liquid as Canada bonds because ________.

Accepted Answer

A)  fewer corporate bonds for any one corporation are traded, making them more costly to sell 
B)  the corporate bond rating must be calculated each time they are traded 
C)  corporate bonds are not callable 
D)  corporate bonds cannot be resold 
A)  fewer corporate bonds for any one corporation are traded, making them more costly to sell 
B)  the corporate bond rating must be calculated each time they are traded 
C)  corporate bonds are not callable 
D)  corporate bonds cannot be resold

Question 17

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

Accepted Answer

A)  expectations theory of the term structure 
B)  segmented markets theory of the term structure 
C)  liquidity premium theory of the term structure 
D)  the inverted yield curve theory of the term structure 
A)  expectations theory of the term structure 
B)  segmented markets theory of the term structure 
C)  liquidity premium theory of the term structure 
D)  the inverted yield curve theory of the term structure

Question 18

If the possibility of a default increases because corporations begin to suffer losses,then the default risk on corporate bonds will ________,and the bonds' returns will become ________ uncertain,meaning that the expected return on these bonds will decrease,everything else held constant.

Accepted Answer

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

Question 19

Which of the following long-term bonds has the highest interest rate?

Accepted Answer

A)  Corporate Baa bonds 
B)  Canada bonds 
C)  Corporate Aaa bonds 
D)  Provincial bonds 
A)  Corporate Baa bonds 
B)  Canada bonds 
C)  Corporate Aaa bonds 
D)  Provincial bonds

Question 20

The interest rate on tax-exempt bonds rises relative to the interest rate on U.S.Treasury securities when ________.

Accepted Answer

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

Exam 6: The Risk and Term Structure of Interest Rates

Risk premiums on corporate bonds tend to ________ during business cycle expansions and ________ during recessions,everything else held constant.

What is the shape of the yield curve when short rates are expected to fall in the medium term,and then increase? Demonstrate this graphically.

Which of the following statements is true?

Tax-exempt bond interest rates increase relative to corporate bond interest rates when ________.

Bonds with no default risk are called ________.

According to the segmented markets theory of the term structure ________.

Typically,yield curves are ________.

Which of the following securities has the lowest interest rate?

If 1-year interest rates for the next five years are expected to be 4,2,5,4,and 5 percent,and the 5-year term premium is 1 percent,than the 5-year bond rate will be ________.

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

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

Three factors explain the risk structure of interest rates: ________.

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

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

Corporate bonds are not as liquid as Canada bonds because ________.

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

If the possibility of a default increases because corporations begin to suffer losses,then the default risk on corporate bonds will ________,and the bonds' returns will become ________ uncertain,meaning that the expected return on these bonds will decrease,everything else held constant.

Which of the following long-term bonds has the highest interest rate?

The interest rate on tax-exempt bonds rises relative to the interest rate on U.S.Treasury securities when ________.

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

Risk premiums on corporate bonds tend to during business cycle expansions and during recessions,everything else held constant.

If the possibility of a default increases because corporations begin to suffer losses,then the default risk on corporate bonds will ,and the bonds' returns will become uncertain,meaning that the expected return on these bonds will decrease,everything else held constant.