Question 1

The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S.Treasury bonds.This is due to

Accepted Answer

A) a reduction in risk. 
B) a reduction in maturity. 
C) a flight to quality. 
D) a flight to liquidity. 
A) a reduction in risk. 
B) a reduction in maturity. 
C) a flight to quality. 
D) a flight to liquidity. C

Question 2

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

Accepted Answer

A) corporate Baa bonds 
B) U.S.Treasury bonds 
C) corporate Aaa bonds 
D) municipal bonds 
A) corporate Baa bonds 
B) U.S.Treasury bonds 
C) corporate Aaa bonds 
D) municipal bonds A

Question 3

Corporate bonds are not as liquid as government 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. A

Question 4

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 5

If 1-year interest rates for the next three years are expected to be 1,1,and 1 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 6

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

Accepted Answer

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

Question 7

A decrease in default risk on corporate bonds ________ the demand for these bonds,and ________ the demand for default-free bonds,everything else held constant.

Accepted Answer

A) increases;lowers 
B) lowers;increases 
C) does not change;greatly increases 
D) moderately lowers;does not change 
A) increases;lowers 
B) lowers;increases 
C) does not change;greatly increases 
D) moderately lowers;does not change

Question 8

The spread between the interest rates on bonds with default risk and default-free bonds is called the

Accepted Answer

A) risk premium. 
B) junk margin. 
C) bond margin. 
D) default premium. 
A) risk premium. 
B) junk margin. 
C) bond margin. 
D) default premium.

Question 9

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 10

Municipal bonds have default risk,yet their interest rates are lower than the rates on default-free Treasury bonds.This suggests that

Accepted Answer

A) the benefit from the tax-exempt status of municipal bonds is less than their default risk. 
B) the benefit from the tax-exempt status of municipal bonds equals their default risk. 
C) the benefit from the tax-exempt status of municipal bonds exceeds their default risk. 
D) Treasury bonds are not default-free. 
A) the benefit from the tax-exempt status of municipal bonds is less than their default risk. 
B) the benefit from the tax-exempt status of municipal bonds equals their default risk. 
C) the benefit from the tax-exempt status of municipal bonds exceeds their default risk. 
D) Treasury bonds are not default-free.

Question 11

According to the segmented markets theory of the term structure

Accepted Answer

A) 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. 
B) buyers of bonds do not prefer bonds of one maturity over another. 
C) interest rates on bonds of different maturities do not move together over time. 
D) buyers require an additional incentive to hold long-term bonds. 
A) 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. 
B) buyers of bonds do not prefer bonds of one maturity over another. 
C) interest rates on bonds of different maturities do not move together over time. 
D) buyers require an additional incentive to hold long-term bonds.

Question 12

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 13

According to the liquidity premium theory of the term structure,a flat 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 14

-The mound-shaped yield curve in the figure above indicates that short-term interest rates are expected to

Accepted Answer

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

Question 15

Which of the following securities has the lowest interest rate?

Accepted Answer

A) junk bonds 
B) U.S.Treasury bonds 
C) investment-grade bonds 
D) corporate Baa bonds 
A) junk bonds 
B) U.S.Treasury bonds 
C) investment-grade bonds 
D) corporate Baa bonds

Question 16

-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 17

If the expected path of one-year interest rates over the next five years is 4 percent,5 percent,7 percent,8 percent,and 6 percent,then the expectations theory predicts that today's interest rate on the five-year bond is

Accepted Answer

A) 4 percent. 
B) 5 percent. 
C) 6 percent. 
D) 7 percent. 
A) 4 percent. 
B) 5 percent. 
C) 6 percent. 
D) 7 percent.

Question 18

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 19

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 20

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

Exam 6: The Risk and Term Structure of Interest Rates

The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S.Treasury bonds.This is due to

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

Corporate bonds are not as liquid as government bonds because

If 1-year interest rates for the next three years are expected to be 1,1,and 1 percent,and the 3-year term premium is 1 percent,than the 3-year bond rate will be

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

A decrease in default risk on corporate bonds ________ the demand for these bonds,and ________ the demand for default-free bonds,everything else held constant.

The spread between the interest rates on bonds with default risk and default-free bonds is called 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.

Municipal bonds have default risk,yet their interest rates are lower than the rates on default-free Treasury bonds.This suggests that

According to the segmented markets theory of the term structure

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 flat yield curve indicates that short-term interest rates are expected to

-The mound-shaped yield curve in the figure above indicates that short-term interest rates are expected to

Which of the following securities has the lowest interest rate?

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

If the expected path of one-year interest rates over the next five years is 4 percent,5 percent,7 percent,8 percent,and 6 percent,then the expectations theory predicts that today's interest rate on the five-year bond is

Three factors explain the risk structure of interest rates

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

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

Why Study Money,banking,and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of 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

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Nonbank Finance

Financial Derivatives

Conflicts of Interest in the Financial Industry

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

Aggregate Demand and Supply Analysis

Monetary Policy Theory

Transmission Mechanisms of Monetary Policy

Financial Crises in Emerging Market Economies

The IS Curve

The Monetary Policy and Aggregate Demand Curves

The Role of Expectations in Monetary Policy

The ISLM Model

Filters

A decrease in the riskiness of corporate bonds will the yield on corporate bonds and the yield on Treasury securities,everything else held constant.

A decrease in default risk on corporate bonds the demand for these bonds,and the demand for default-free bonds,everything else held constant.

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

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

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