Exam 6: The Risk and Term Structure of Interest Rates

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

If the probability of a bond default increases because corporations begin to suffer large losses,then the default risk on corporate bonds will ________ and the expected return on these bonds will ________,everything else held constant.

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

In actual practice,short-term interest rates and long-term interest rates usually move together; this is the major shortcoming of the ________.

The spread between interest rates on low quality corporate bonds and Canada bonds ________.

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 government securities will ________.

Which of the following statements is true?

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 ________.

According to the expectations theory of the term structure ________.

As their relative riskiness ________,the expected return on corporate bonds ________ relative to the expected return on default-free bonds,everything else held constant.