Question 1

If income tax rates were lowered, then ________.

Accepted Answer

A) the prices of tax-exempt bonds would fall 
B) the interest rate on tax-exempt bonds would fall 
C) the interest rate on U.S. Treasury bonds would rise 
D) the prices of tax-exempt bonds would rise 
A) the prices of tax-exempt bonds would fall 
B) the interest rate on tax-exempt bonds would fall 
C) the interest rate on U.S. Treasury bonds would rise 
D) the prices of tax-exempt bonds would rise

Question 2

Which of the following statements is true?

Accepted Answer

A) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. 
B) The interest rate on corporate bonds decreases as default risk increases. 
C) A corporate bond's return becomes less uncertain as default risk increases. 
D) As their relative riskiness increases, the interest rate on corporate bonds increases relative to the interest rate on default-free bonds. 
A) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. 
B) The interest rate on corporate bonds decreases as default risk increases. 
C) A corporate bond's return becomes less uncertain as default risk increases. 
D) As their relative riskiness increases, the interest rate on corporate bonds increases relative to the interest rate on default-free bonds.

Question 3

If the probability of a bond default increases because corporations begin to suffer large losses, then the default risk on corporate bonds will ________ and the expected return on these bonds will ________, everything else held constant.

Accepted Answer

A) decrease; increase 
B) decrease; decrease 
C) increase; increase 
D) increase; decrease 
A) decrease; increase 
B) decrease; decrease 
C) increase; increase 
D) increase; decrease

Question 4

Default risk is the risk that ________.

Accepted Answer

A) a bond issuer is unable to make interest payments 
B) a bond issuer is unable to make a profit 
C) a bond issuer is unable to pay the face value at maturity 
D) A and C only 
A) a bond issuer is unable to make interest payments 
B) a bond issuer is unable to make a profit 
C) a bond issuer is unable to pay the face value at maturity 
D) A and C only

Question 5

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

Accepted Answer

A) Municipal bonds 
B) Investment-grade bonds 
C) Canadian government bonds 
D) Junk bonds 
A) Municipal bonds 
B) Investment-grade bonds 
C) Canadian government bonds 
D) Junk bonds

Question 6

According to the liquidity premium theory of the term structure, a slightly upward sloping 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 7

A ________ yield curve predicts a future increase in inflation.

Accepted Answer

A) steeply upward sloping 
B) slight upward sloping 
C) flat 
D) downward sloping 
A) steeply upward sloping 
B) slight upward sloping 
C) flat 
D) downward sloping

Question 8

The segmented markets theory can explain ________.

Accepted Answer

A) why yield curves usually tend to slope upward 
B) why interest rates on bonds of different maturities tend to move together 
C) why yield curves tend to slope upward when short-term interest rates are low and to be inverted when short-term interest rates are high 
D) why yield curves have been used to forecast business cycles 
A) why yield curves usually tend to slope upward 
B) why interest rates on bonds of different maturities tend to move together 
C) why yield curves tend to slope upward when short-term interest rates are low and to be inverted when short-term interest rates are high 
D) why yield curves have been used to forecast business cycles

Question 9

According to this theory of the term structure, bonds of different maturities are not substitutes for one another.

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 10

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 ________.

Accepted Answer

A) investment grade; lower grade 
B) investment grade; junk bonds 
C) high quality; lower grade 
D) high quality; junk bonds 
A) investment grade; lower grade 
B) investment grade; junk bonds 
C) high quality; lower grade 
D) high quality; junk bonds

Question 11

Bonds with no default risk are called ________.

Accepted Answer

A) flower bonds 
B) no-risk bonds 
C) default-free bonds 
D) zero-risk bonds 
A) flower bonds 
B) no-risk bonds 
C) default-free bonds 
D) zero-risk bonds

Question 12

According to the expectations theory of the term structure, the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond.

Accepted Answer

A) average 
B) sum 
C) difference 
D) multiple 
A) average 
B) sum 
C) difference 
D) multiple

Question 13

As default risk increases and bond prices adjust, the expected return on corporate bonds ________, and the return becomes ________ uncertain, everything else held constant.

Accepted Answer

A) increases; less 
B) increases; more 
C) decreases; less 
D) decreases; more 
A) increases; less 
B) increases; more 
C) decreases; less 
D) decreases; more

Question 14

According to the segmented markets theory of the term structure ________.

Accepted Answer

A) bonds of one maturity are close substitutes for bonds of other maturities, therefore, interest rates on bonds of different maturities move together over time 
B) the interest rate for each maturity bond is determined by supply and demand for that maturity bond 
C) investors' strong preferences for short-term relative to long-term bonds explains why yield curves typically slope downward 
D) because of the positive term premium, the yield curve will not be observed to be downward-sloping 
A) bonds of one maturity are close substitutes for bonds of other maturities, therefore, interest rates on bonds of different maturities move together over time 
B) the interest rate for each maturity bond is determined by supply and demand for that maturity bond 
C) investors' strong preferences for short-term relative to long-term bonds explains why yield curves typically slope downward 
D) because of the positive term premium, the yield curve will not be observed to be downward-sloping

Question 15

The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is ________.

Accepted Answer

A) interest rate risk 
B) inflation risk 
C) moral hazard 
D) default risk 
A) interest rate risk 
B) inflation risk 
C) moral hazard 
D) default risk

Question 16

When interest rates on 1-2-3-4-5 year bonds are 2.0, 2.1, 2.3, 2.4, and 2.5 percent respectively, what information do we derive on future economic growth and real output?

Accepted Answer

According to these interest rates, the y

Question 17

If income tax rates were lowered, then ________.

Accepted Answer

A) the interest rate on tax-exempt bonds would rise 
B) the interest rate on U.S. Treasury bonds would rise 
C) the interest rate on tax-exempt bonds would fall 
D) the interest rate on tax-exempt bonds would stay the same 
A) the interest rate on tax-exempt bonds would rise 
B) the interest rate on U.S. Treasury bonds would rise 
C) the interest rate on tax-exempt bonds would fall 
D) the interest rate on tax-exempt bonds would stay the same

Question 18

According to the liquidity premium theory, a yield curve that is flat means that ________.

Accepted Answer

A) bond purchasers expect interest rates to rise in the future 
B) bond purchasers expect interest rates to stay the same 
C) bond purchasers expect interest rates to fall in the future 
D) the yield curve has nothing to do with expectations of bond purchasers 
A) bond purchasers expect interest rates to rise in the future 
B) bond purchasers expect interest rates to stay the same 
C) bond purchasers expect interest rates to fall in the future 
D) the yield curve has nothing to do with expectations of bond purchasers

Question 19

As their relative riskiness ________, the equilibrium price of corporate bonds ________ relative to the expected return on default-free bonds, everything else held constant.

Accepted Answer

A) increases; increases 
B) increases; decreases 
C) decreases; decreases 
D) decreases; does not change 
A) increases; increases 
B) increases; decreases 
C) decreases; decreases 
D) decreases; does not change

Question 20

Based on default risk, which bonds are called: a. "investment grade", b. "junk bonds" or "speculative-grade", and c. "fallen angels"?

Accepted Answer

a. Investment grade are the bonds that h

Exam 6: The Risk and Term Structure of Interest Rates

If income tax rates were lowered, then ________.

Which of the following statements is true?

If the probability of a bond default increases because corporations begin to suffer large losses, then the default risk on corporate bonds will ________ and the expected return on these bonds will ________, everything else held constant.

Default risk is the risk that ________.

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

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

A ________ yield curve predicts a future increase in inflation.

The segmented markets theory can explain ________.

According to this theory of the term structure, bonds of different maturities are not substitutes for one another.

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 ________.

Bonds with no default risk are called ________.

According to the expectations theory of the term structure, the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond.

As default risk increases and bond prices adjust, the expected return on corporate bonds ________, and the return becomes ________ uncertain, everything else held constant.

According to the segmented markets theory of the term structure ________.

The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is ________.

When interest rates on 1-2-3-4-5 year bonds are 2.0, 2.1, 2.3, 2.4, and 2.5 percent respectively, what information do we derive on future economic growth and real output?

If income tax rates were lowered, then ________.

According to the liquidity premium theory, a yield curve that is flat means that ________.

As their relative riskiness ________, the equilibrium price of corporate bonds ________ relative to the expected return on default-free bonds, everything else held constant.

Based on default risk, which bonds are called: a. "investment grade", b. "junk bonds" or "speculative-grade", and c. "fallen angels"?

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

If the probability of a bond default increases because corporations begin to suffer large losses, then the default risk on corporate bonds will and the expected return on these bonds will , everything else held constant.

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 .

As default risk increases and bond prices adjust, the expected return on corporate bonds , and the return becomes uncertain, everything else held constant.

As their relative riskiness , the equilibrium price of corporate bonds relative to the expected return on default-free bonds, everything else held constant.