Exam 6: The Risk and Term Structure of Interest Rates

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

-The steeply upward sloping yield curve in the figure above indicates that ________.

An increase in default risk on corporate bonds ________ the demand for these bonds, but ________ the demand for default-free bonds, everything else held constant.

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

During a "flight to quality" ________.

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

Three factors explain the risk structure of interest rates: ________.

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

Canadian government bonds have no default risk because ________.

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 ________.

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 ________.

When yield curves are downward sloping, ________.

Which of the following securities has the lowest interest rate?

If the expected path of 1-year interest rates over the next four years is 5 percent, 4 percent, 2 percent, and 1 percent, then the expectations theory predicts that today's interest rate on the four-year bond is ________.

When yield curves are flat, ________.

An inverted yield curve predicts that short-term interest rates ________.

An inverted yield curve ________.

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

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

Bonds with relatively low risk of default are called ________.