Question 1

The terrorist attack on the World Trade Center on September 11, 2001:

Accepted Answer

A) triggered a flight to quality in the bond market. 
B) caused the demand for U.S.Treasury securities to fall and the demand for corporate bonds to rise. 
C) caused the price of U.S.Treasury securities to fall and the yields on corporate bonds to fall. 
D) did not have any significant impact since the risk on all bonds increased. 
A) triggered a flight to quality in the bond market. 
B) caused the demand for U.S.Treasury securities to fall and the demand for corporate bonds to rise. 
C) caused the price of U.S.Treasury securities to fall and the yields on corporate bonds to fall. 
D) did not have any significant impact since the risk on all bonds increased.

Question 2

The risk structure of interest rates refers to the:

Accepted Answer

A) relationship among the interest rates of bonds with different maturities. 
B) relationship among the interest rates of bonds from different issuers with the same maturities. 
C) relationship among the interest rates of bonds from the same issuer but different maturities. 
D) additional interest required to compensate the buyer for the longer maturity of the bond. 
A) relationship among the interest rates of bonds with different maturities. 
B) relationship among the interest rates of bonds from different issuers with the same maturities. 
C) relationship among the interest rates of bonds from the same issuer but different maturities. 
D) additional interest required to compensate the buyer for the longer maturity of the bond.

Question 3

When the yield curve slope is more upward sloping than usual, people are expecting:

Accepted Answer

A) an economic slowdown. 
B) the U.S.Treasury may default on its obligations. 
C) the Federal Reserve is going to ease monetary policy. 
D) a future rise in short-term interest rates. 
A) an economic slowdown. 
B) the U.S.Treasury may default on its obligations. 
C) the Federal Reserve is going to ease monetary policy. 
D) a future rise in short-term interest rates.

Question 4

U.S.Treasury securities are considered to carry no risk spread because:

Accepted Answer

A) they are the closest thing to default-risk free that an investor can obtain. 
B) the prices of U.S.Treasury bonds never change. 
C) the yields on U.S.Treasury bonds never change. 
D) the yields on U.S.Treasury bonds are always low. 
A) they are the closest thing to default-risk free that an investor can obtain. 
B) the prices of U.S.Treasury bonds never change. 
C) the yields on U.S.Treasury bonds never change. 
D) the yields on U.S.Treasury bonds are always low.

Question 5

The economy enters a period of robust economic growth that is expected to last for several years.How would this be reflected in the risk structure of interest rates?

Accepted Answer

A) An inverted yield curve 
B) A decrease in the term spread 
C) A decrease in the interest rate spread 
D) An increase in yields on tax-exempt bonds 
A) An inverted yield curve 
B) A decrease in the term spread 
C) A decrease in the interest rate spread 
D) An increase in yields on tax-exempt bonds

Question 6

Once a bond rating is assigned, it:

Accepted Answer

A) never changes over the life of the bond. 
B) can change as the financial position of the issuer changes. 
C) can only change if the rating change is approved by the securities and exchange commission. 
D) can change on the next bond from the issuer but is fixed for the current bond. 
A) never changes over the life of the bond. 
B) can change as the financial position of the issuer changes. 
C) can only change if the rating change is approved by the securities and exchange commission. 
D) can change on the next bond from the issuer but is fixed for the current bond.

Question 7

Which of the following would be most likely to earn an AAA rating from Standard & Poor's?

Accepted Answer

A) A 10-year bond issued by Canada 
B) A bond issue by a new vegetarian fast-food chain 
C) A 10-year bond issued by a state or municipality 
D) Shares of stock in Coca-Cola 
A) A 10-year bond issued by Canada 
B) A bond issue by a new vegetarian fast-food chain 
C) A 10-year bond issued by a state or municipality 
D) Shares of stock in Coca-Cola

Question 8

Any theory of the term structure of interest rates needs to explain each of the following, except why:

Accepted Answer

A) short-term yields are more volatile than long-term yields. 
B) the yields of different maturities tend to move together. 
C) short-term yields are usually higher than long-term yields. 
D) long-term yields are usually higher than short-term yields. 
A) short-term yields are more volatile than long-term yields. 
B) the yields of different maturities tend to move together. 
C) short-term yields are usually higher than long-term yields. 
D) long-term yields are usually higher than short-term yields.

Question 9

In 2003, ratings agencies downgraded bonds issued by the State of California several times.How will this affect the market for these bonds?

Accepted Answer

A) Yields on these bonds will decrease and the yield on Treasury bonds will increase. 
B) The yield on these bonds will not change, nor will the yield on Treasury bonds. 
C) The yield on these bonds and on Treasury bonds will both decrease. 
D) Yields on these bonds will increase. 
A) Yields on these bonds will decrease and the yield on Treasury bonds will increase. 
B) The yield on these bonds will not change, nor will the yield on Treasury bonds. 
C) The yield on these bonds and on Treasury bonds will both decrease. 
D) Yields on these bonds will increase.

Question 10

What is the main purpose (function) of bond rating services?

Accepted Answer

These companies monitor the st

Question 11

The usually upward sloping yield curve indicates that long-term bonds have higher yields than short-term bonds.Why is this?

Accepted Answer

Bondholders face both inflatio

Question 12

An investor sees the current twelve-month rate at 4% and expects the following future twelve-month rate for each of the subsequent years; 4.5%, 5.5% and 6.0%.If this investor views a four-year maturity at 5.65% as equal to four consecutive one-year securities, what is his/her risk premium?

Accepted Answer

The answer of An investor sees the current twelve-month rate...

Question 13

What is meant by a subprime mortgage?

Accepted Answer

A subprime mortgage does not m

Question 14

Using the information provided and the Expectations Hypothesis, compute the yields for a two-year, three-year, and four-year bonds.

Accepted Answer

@#IMG-DLM& Now, suppose there is a risk premium at

Question 15

If a local government eliminates the tax exemption on municipal bonds, we'd expect to see:

Accepted Answer

A) an increase in the yield on taxable bonds. 
B) a decrease in the gap in yields on taxable and tax-exempt bonds. 
C) a decrease in the yield on municipal bonds. 
D) municipal bonds will become more attractive to investors. 
A) an increase in the yield on taxable bonds. 
B) a decrease in the gap in yields on taxable and tax-exempt bonds. 
C) a decrease in the yield on municipal bonds. 
D) municipal bonds will become more attractive to investors.

Question 16

Consider the following four investors.Rank each according to who has the most to gain from investing in 30-year tax-exempt municipal bonds.Each investor has $1000 in a savings account that he/she plans to use to buy bonds.Explain briefly why you ranked the investors this way.
(a) A 20-year old college student who earns low income through working over summers and breaks.The student plans to graduate next year.
(b) The CEO of a large company who is currently in the highest tax bracket.
(c) A middle-income household saving up to move into a larger home.
(d) A 60-year old nurse who plans to retire at age 62.He uses a tax-exempt pension fund for all of his savings.

Accepted Answer

(b), (c), (a), (d)
The CEO has the most

Question 17

What is the highest bond rating assigned by Standard and Poor's?

Accepted Answer

A) AA 
B) EEE 
C) AAA 
D) A 
A) AA 
B) EEE 
C) AAA 
D) A

Question 18

If their only concern were the cost of issuing municipal debt, how would you expect the mayors of most U.S.cities to respond to a revenue-neutral change in the federal income tax that sharply lowered the top marginal tax rate?

Accepted Answer

A) Favorably, since this will significantly increase the demand for municipal bonds. 
B) Unfavorably, the demand for municipal bonds will fall and their yields will increase. 
C) Favorably, the price of municipal bonds should increase and their yields fall. 
D) No reaction, this should have no impact on municipal bonds at all. 
A) Favorably, since this will significantly increase the demand for municipal bonds. 
B) Unfavorably, the demand for municipal bonds will fall and their yields will increase. 
C) Favorably, the price of municipal bonds should increase and their yields fall. 
D) No reaction, this should have no impact on municipal bonds at all.

Question 19

Imagine a scandal that finds the officers of bond rating agencies have been taking bribes to inflate the rating of specific bonds.This should:

Accepted Answer

A) have no impact on the bond market since bond markets are highly efficient. 
B) decrease the demand for all bonds. 
C) increase the demand for U.S.Treasury securities and decrease the demand for corporate bonds. 
D) decrease the risk spread. 
A) have no impact on the bond market since bond markets are highly efficient. 
B) decrease the demand for all bonds. 
C) increase the demand for U.S.Treasury securities and decrease the demand for corporate bonds. 
D) decrease the risk spread.

Question 20

If the yield curve is flat, using liquidity premium theory, what do you know about the expected future short-term interest rate?

Accepted Answer

If the yield curve is flat, the expected

Exam 7: The Risk and Term Structure of Interest Rates

The terrorist attack on the World Trade Center on September 11, 2001:

The risk structure of interest rates refers to the:

When the yield curve slope is more upward sloping than usual, people are expecting:

U.S.Treasury securities are considered to carry no risk spread because:

The economy enters a period of robust economic growth that is expected to last for several years.How would this be reflected in the risk structure of interest rates?

Once a bond rating is assigned, it:

Which of the following would be most likely to earn an AAA rating from Standard & Poor's?

Any theory of the term structure of interest rates needs to explain each of the following, except why:

In 2003, ratings agencies downgraded bonds issued by the State of California several times.How will this affect the market for these bonds?

What is the main purpose (function) of bond rating services?

The usually upward sloping yield curve indicates that long-term bonds have higher yields than short-term bonds.Why is this?

An investor sees the current twelve-month rate at 4% and expects the following future twelve-month rate for each of the subsequent years; 4.5%, 5.5% and 6.0%.If this investor views a four-year maturity at 5.65% as equal to four consecutive one-year securities, what is his/her risk premium?

What is meant by a subprime mortgage?

Using the information provided and the Expectations Hypothesis, compute the yields for a two-year, three-year, and four-year bonds.

If a local government eliminates the tax exemption on municipal bonds, we'd expect to see:

What is the highest bond rating assigned by Standard and Poor's?

If their only concern were the cost of issuing municipal debt, how would you expect the mayors of most U.S.cities to respond to a revenue-neutral change in the federal income tax that sharply lowered the top marginal tax rate?

Imagine a scandal that finds the officers of bond rating agencies have been taking bribes to inflate the rating of specific bonds.This should:

If the yield curve is flat, using liquidity premium theory, what do you know about the expected future short-term interest rate?

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value, and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

Stocks, Stock Markets, and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange-Rate Policy and the Central Bank

Money Growth, Money Demand, and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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