Question 1

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

Accepted Answer

A) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds 
B) buyers of bonds do not prefer bonds of one maturity over another 
C) interest rates on bonds of different maturities do not move together over time 
D) buyers require an additional incentive to hold long-term bonds 
A) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds 
B) buyers of bonds do not prefer bonds of one maturity over another 
C) interest rates on bonds of different maturities do not move together over time 
D) buyers require an additional incentive to hold long-term bonds

Question 2

If income tax rates were lowered, then ________.

Accepted Answer

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

Question 3

What is the shape of the yield curve when short rates are expected to fall in the medium term, and then increase? Demonstrate this graphically.

Accepted Answer

The curve will have

Question 4

Explain using a diagram how the "flight to quality" after the Subprime collapse lead to a rising spread between lower-quality (BBB-rated)and highest-quality (AAA-rated)bonds.

Accepted Answer

Students must use supply and demand anal

Question 5

If bonds with different maturities are perfect substitutes, then the ________ on these bonds must be equal.

Accepted Answer

A) expected return 
B) surprise return 
C) surplus return 
D) excess return 
A) expected return 
B) surprise return 
C) surplus return 
D) excess return

Question 6

Demonstrate graphically and explain how a reduction in default risk affects the demand or supply of corporate and Canada bonds.

Accepted Answer

A reduction of default risk increases th

Question 7

Which of the following bonds would have the highest default risk?

Accepted Answer

A) Provincial bonds 
B) Investment-grade bonds 
C) Canada bonds 
D) Junk bonds 
A) Provincial bonds 
B) Investment-grade bonds 
C) Canada bonds 
D) Junk bonds

Question 8

What is the shape of the yield curve when short-term rates are expected to rise sharply in the mid-term and moderately in the long-term?

Accepted Answer

@#IMG-DLM& The students must draw a yield curve li

Question 9

Bonds with relatively high risk of default are called ________.

Accepted Answer

A) Brady bonds 
B) junk bonds 
C) zero coupon bonds 
D) investment grade bonds 
A) Brady bonds 
B) junk bonds 
C) zero coupon bonds 
D) investment grade bonds

Question 10

Tax-exempt bond interest rates increase relative to corporate bond interest rates when ________.

Accepted Answer

A) income taxes are increased 
B) corporate bonds become riskier 
C) U)S. Treasury securities become more widely traded 
D) there is a major default in the tax-exempt bond market 
A) income taxes are increased 
B) corporate bonds become riskier 
C) U)S. Treasury securities become more widely traded 
D) there is a major default in the tax-exempt bond market

Question 11

Which of the following long-term bonds has the highest interest rate?

Accepted Answer

A) Corporate Baa bonds 
B) Canada bonds 
C) Corporate Aaa bonds 
D) Provincial bonds 
A) Corporate Baa bonds 
B) Canada bonds 
C) Corporate Aaa bonds 
D) Provincial bonds

Question 12

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

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 13

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 ________.

Accepted Answer

A) a rise in short-term interest rates in the near future and a decline further out in the future 
B) constant short-term interest rates in the near future and further out in the future 
C) a decline in short-term interest rates in the near future and a rise further out in the future 
D) a decline in short-term interest rates in the near future and an even steeper decline further out in the future 
A) a rise in short-term interest rates in the near future and a decline further out in the future 
B) constant short-term interest rates in the near future and further out in the future 
C) a decline in short-term interest rates in the near future and a rise further out in the future 
D) a decline in short-term interest rates in the near future and an even steeper decline further out in the future

Question 14

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

Question 15

The term structure of interest rates is ________.

Accepted Answer

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

Question 16

Which of the following statements is true?

Accepted Answer

A) A liquid asset is one that can be quickly and cheaply converted into cash. 
B) The demand for a bond declines when it becomes less liquid, decreasing the interest rate spread between it and relatively more liquid bonds. 
C) The differences in bond interest rates reflect differences in default risk only. 
D) The corporate bond market is the most liquid bond market. 
A) A liquid asset is one that can be quickly and cheaply converted into cash. 
B) The demand for a bond declines when it becomes less liquid, decreasing the interest rate spread between it and relatively more liquid bonds. 
C) The differences in bond interest rates reflect differences in default risk only. 
D) The corporate bond market is the most liquid bond market.

Question 17

The spread between the interest rates on Baa corporate bonds and Canada bonds was very large during the Great Depression years 1930-1933. Explain this difference using the bond supply and demand analysis.

Accepted Answer

During the Great Depression many busines

Question 18

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

Accepted Answer

A) bonds of different maturities are not substitutes 
B) if yield curves are downward sloping, then short-term interest rates are expected to fall by so much that, even when the positive term premium is added, long-term rates fall below short-term rates 
C) yield curves should never slope downward 
D) interest rates on bonds of different maturities do not move together over time 
A) bonds of different maturities are not substitutes 
B) if yield curves are downward sloping, then short-term interest rates are expected to fall by so much that, even when the positive term premium is added, long-term rates fall below short-term rates 
C) yield curves should never slope downward 
D) interest rates on bonds of different maturities do not move together over time

Question 19

The preferred habitat theory of the term structure is closely related to the ________.

Accepted Answer

A) expectations theory of the term structure 
B) segmented markets theory of the term structure 
C) liquidity premium theory of the term structure 
D) the inverted yield curve theory of the term structure 
A) expectations theory of the term structure 
B) segmented markets theory of the term structure 
C) liquidity premium theory of the term structure 
D) the inverted yield curve theory of the term structure

Question 20

Differences in ________ explain why interest rates on Treasury securities are not all the same.

Accepted Answer

A) risk 
B) liquidity 
C) time to maturity 
D) tax characteristics 
A) risk 
B) liquidity 
C) time to maturity 
D) tax characteristics

Exam 6: The Risk and Term Structure of Interest Rates

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

If income tax rates were lowered, then ________.

What is the shape of the yield curve when short rates are expected to fall in the medium term, and then increase? Demonstrate this graphically.

Explain using a diagram how the "flight to quality" after the Subprime collapse lead to a rising spread between lower-quality (BBB-rated)and highest-quality (AAA-rated)bonds.

If bonds with different maturities are perfect substitutes, then the ________ on these bonds must be equal.

Demonstrate graphically and explain how a reduction in default risk affects the demand or supply of corporate and Canada bonds.

Which of the following bonds would have the highest default risk?

What is the shape of the yield curve when short-term rates are expected to rise sharply in the mid-term and moderately in the long-term?

Bonds with relatively high risk of default are called ________.

Tax-exempt bond interest rates increase relative to corporate bond interest rates when ________.

Which of the following long-term bonds has the highest interest rate?

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

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 ________.

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

The term structure of interest rates is ________.

Which of the following statements is true?

The spread between the interest rates on Baa corporate bonds and Canada bonds was very large during the Great Depression years 1930-1933. Explain this difference using the bond supply and demand analysis.

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

The preferred habitat theory of the term structure is closely related to the ________.

Differences in ________ explain why interest rates on Treasury securities are not all the same.

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

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