Exam 6: The Risk and Term Structure of Interest Rates

Which of the following statements is true?

During the Great Depression years 1930-1933 there was a very high rate of business failures and defaults, we would expect the risk premium for ________ bonds to be very high.

If a corporation begins to suffer large losses, then the default risk on the corporate bond will ________, everything else held constant.

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 collapse of the subprime mortgage market ________.

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.

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, ________.

Economists' attempts to explain the term structure of interest rates ________.

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

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 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 ________.

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

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 ________.

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.

The interest rate on tax-exempt bonds rises relative to the interest rate on U.S. Treasury securities when ________.

According to the liquidity premium theory of the term structure ________.

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

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 ________.

If a higher inflation is expected, what would you expect to happen to the shape of the yield curve? Why?

If the possibility of a default increases because corporations begin to suffer losses, then the default risk on corporate bonds will ________, and the bonds' returns will become ________ uncertain, meaning that the expected return on these bonds will decrease, everything else held constant.