Exam 6: The Risk and Term Structure of Interest Rates

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.

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 ________.

Over the next three years,the expected path of 1-year interest rates is 4,1,and 1 percent.The expectations theory of the term structure predicts that the current interest rate on 3-year bond is

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 Treasury bonds shifts to the ________.

Everything else held constant,the interest rate on municipal bonds rises relative to the interest rate on Treasury securities when

U.S.government bonds have no default risk because

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

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

According to the expectations 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

The risk structure of interest rates is

The spread between the interest rates on Baa corporate bonds and U.S.government bonds is very large during the Great Depression years 1930-1933.Explain this difference using the bond supply and demand analysis.

Everything else held constant,a decrease in marginal tax rates would likely have the effect of ________ the demand for municipal bonds,and ________ the demand for U.S.government bonds.

Bonds with relatively high risk of default are called

During a "flight to quality"

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

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

The collapse of the subprime mortgage market

When yield curves are flat

If you have a very low tolerance for risk,which of the following bonds would you be least likely to hold in your portfolio?