Question 1

-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 2

An increase in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on government securities, 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

Question 3

According to the expectations theory of the term structure ________.

Accepted Answer

A) when the yield curve is steeply upward sloping, short-term interest rates are expected to remain relatively stable in the future 
B) when the yield curve is downward sloping, short-term interest rates are expected to remain relatively stable in the future 
C) investors have strong preferences for short-term relative to long-term bonds, explaining why yield curves typically slope upward 
D) yield curves should be equally likely to slope downward as slope upward 
A) when the yield curve is steeply upward sloping, short-term interest rates are expected to remain relatively stable in the future 
B) when the yield curve is downward sloping, short-term interest rates are expected to remain relatively stable in the future 
C) investors have strong preferences for short-term relative to long-term bonds, explaining why yield curves typically slope upward 
D) yield curves should be equally likely to slope downward as slope upward

Question 4

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

Accepted Answer

A) there is a major default in the tax-exempt bond market 
B) income tax rates are raised 
C) tax-exempt bonds become less widely traded 
D) corporate bonds become riskier 
A) there is a major default in the tax-exempt bond market 
B) income tax rates are raised 
C) tax-exempt bonds become less widely traded 
D) corporate bonds become riskier

Question 5

An increase in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the interest rate on those corporate 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

Question 6

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

Accepted Answer

A) less liquid than 
B) less speculative than 
C) tax-exempt unlike 
D) lower-yielding than 
A) less liquid than 
B) less speculative than 
C) tax-exempt unlike 
D) lower-yielding than

Question 7

When yield curves are steeply upward sloping, ________.

Accepted Answer

A) long-term interest rates are above short-term interest rates 
B) short-term interest rates are above long-term interest rates 
C) short-term interest rates are about the same as long-term interest rates 
D) medium-term interest rates are above both short-term and long-term interest rates 
A) long-term interest rates are above short-term interest rates 
B) short-term interest rates are above long-term interest rates 
C) short-term interest rates are about the same as long-term interest rates 
D) medium-term interest rates are above both short-term and long-term interest rates

Question 8

The risk structure of interest rates is ________.

Accepted Answer

A) the structure of how interest rates move over time 
B) the relationship among interest rates of different bonds with the same maturity 
C) the relationship among the term to maturity of different bonds 
D) the relationship among interest rates on bonds with different maturities 
A) the structure of how interest rates move over time 
B) the relationship among interest rates of different bonds with the same maturity 
C) the relationship among the term to maturity of different bonds 
D) the relationship among interest rates on bonds with different maturities

Question 9

Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Canada bonds to the ________.

Accepted Answer

A) right; right 
B) right; left 
C) left; right 
D) left; left 
A) right; right 
B) right; left 
C) left; right 
D) left; left

Question 10

Explain the factors that determine the risk structure of interest rates. Explain how a change of each factor changes interest rates.

Accepted Answer

Default risk is the risk that interest o

Question 11

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

Accepted Answer

A) a risk-structure curve 
B) a default-free curve 
C) a yield curve 
D) an interest-rate curve 
A) a risk-structure curve 
B) a default-free curve 
C) a yield curve 
D) an interest-rate curve

Question 12

If 1-year interest rates for the next three years are expected to be 4, 2, and 3 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 13

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

Question 14

A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium.

Accepted Answer

A) positive; raise 
B) positive; lower 
C) negative; raise 
D) negative; lower 
A) positive; raise 
B) positive; lower 
C) negative; raise 
D) negative; lower

Question 15

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 Canada bonds shifts to the ________.

Accepted Answer

A) right; right 
B) right; left 
C) left; left 
D) left; right 
A) right; right 
B) right; left 
C) left; left 
D) left; right

Question 16

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.

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 17

If the U.S. government where to raise the income tax rates, would this have any impact on a state's cost of borrowing funds? Explain.

Accepted Answer

Yes, if the U.S. government raises incom

Question 18

When Canada bonds become more liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Canada bonds shifts to the ________.

Accepted Answer

A) right; right 
B) right; left 
C) left; right 
D) left; left 
A) right; right 
B) right; left 
C) left; right 
D) left; left

Question 19

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 20

Corporate bonds are not as liquid as Canada 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

Exam 6: The Risk and Term Structure of Interest Rates

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

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

According to the expectations theory of the term structure ________.

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

An increase in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the interest rate on those corporate bonds, everything else held constant.

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

When yield curves are steeply upward sloping, ________.

The risk structure of interest rates is ________.

Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Canada bonds to the ________.

Explain the factors that determine the risk structure of interest rates. Explain how a change of each factor changes interest rates.

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

If 1-year interest rates for the next three years are expected to be 4, 2, and 3 percent, and the 3-year term premium is 1 percent, than the 3-year bond rate will be ________.

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

A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium.

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 Canada bonds shifts to the ________.

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.

If the U.S. government where to raise the income tax rates, would this have any impact on a state's cost of borrowing funds? Explain.

When Canada bonds become more liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Canada bonds shifts to the ________.

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

Corporate bonds are not as liquid as Canada bonds because ________.

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behaviour of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

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

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

Financial Crises in Emerging Markets

The ISLM Model

Non-Bank Finance

Filters

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

An increase in the liquidity of corporate bonds will the price of corporate bonds and the interest rate on those corporate bonds, everything else held constant.

Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the and the demand curve for Canada bonds to the .

A bond with default risk will always have a risk premium and an increase in its default risk will the risk premium.

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 Canada bonds shifts to the .

When Canada bonds become more liquid, other things equal, the demand curve for corporate bonds shifts to the and the demand curve for Canada bonds shifts to the .