Exam 6: The Risk and Term Structure of Interest Rates

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

Bonds with relatively low risk of default are called ________.

A ________ yield curve predicts a future increase in inflation.

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 Canada bonds shifts to the ________.

If income tax rates were lowered,then ________.

Explain using a diagram how the "flight to quality" after the Subprime collapse lead to a rising spread between lower-quality (BBB-rated)and highest-quality (AAA-rated)bonds.

Which of the following bonds are considered to be default-risk free?

The risk structure of interest rates is ________.

The ________ of the term structure states the following: the interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of the long-term bond plus a term premium that responds to supply and demand conditions for that bond.

Economists' attempts to explain the term structure of 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?

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

If the expected path of 1-year interest rates over the next five years is 2 percent,4 percent,1 percent,4 percent,and 3 percent,the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of ________.

If income tax rates were lowered,then ________.

When short-term interest rates are expected to fall sharply in the future,the yield curve will ________.

Which of the following bonds would have the highest default risk?

Canadian government bonds have no default risk because ________.

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

Demonstrate graphically and explain how a reduction in default risk affects the demand or supply of corporate and Canada bonds.

If the yield curve slope is flat for short maturities and then slopes steeply upward for longer maturities,the liquidity premium theory (assuming a mild preference for shorter-term bonds)indicates that the market is predicting ________.