Exam 6: The Risk and Term Structure of Interest Rates

If the yield curve has a mild upward slope,the liquidity premium theory (assuming a mild preference for shorter-term bonds)indicates that the market is predicting

Which of the following statements is TRUE?

A key assumption in the segmented markets theory is that bonds of different maturities

A plot of the interest rates on default-free government bonds with different terms to maturity is called

The additional incentive that the purchaser of a Treasury security requires to buy a long-term security rather than a short-term security is called the

If the expected path of 1-year interest rates over the next five years is 1 percent,2 percent,3 percent,4 percent,and 5 percent,the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of

The Obama administration increased the tax on the top income tax bracket from 35% to 39%.Supply and demand analysis predicts the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds,all else the same.

-The steeply upward sloping yield curve in the figure above indicates that ________ interest rates are expected to ________ in the future.

Everything else held constant,if the tax-exempt status of municipal bonds were eliminated,then

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

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

When yield curves are steeply upward sloping

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

The expectations theory and the segmented markets theory do not explain the facts very well,but they provide the groundwork for the most widely accepted theory of the term structure of interest rates

An inverted yield curve

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

According to the liquidity premium theory of the term structure

A(n)________ in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds,all else equal.

When yield curves are downward sloping

An increase 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 ________.