Question 1

Municipal bonds are issued by:

Accepted Answer

A) cities only. 
B) the U.S.Treasury, but the proceeds can only be used by cities. 
C) states and cities, but their interest is taxable only at the federal level. 
D) states and cities and their interest is exempt from U.S.government taxation. 
A) cities only. 
B) the U.S.Treasury, but the proceeds can only be used by cities. 
C) states and cities, but their interest is taxable only at the federal level. 
D) states and cities and their interest is exempt from U.S.government taxation.

Question 2

Assume the Expectations Hypothesis regarding the term structure of interest rates is correct.If the current one-year interest rate is 3% and the one-year-ahead expected one-year interest rate is 5%, then the current two-year interest rate should be:

Accepted Answer

A) 3%. 
B) 5%. 
C) 4%. 
D) 8%. 
A) 3%. 
B) 5%. 
C) 4%. 
D) 8%.

Question 3

The addition of the Liquidity Premium Theory to the Expectations Hypothesis allows us to explain why:

Accepted Answer

A) yield curves usually slope upward. 
B) interest rates on bonds of different maturities move together. 
C) long-term interest rates are less volatile than short term interest rates. 
D) yield curves are flat. 
A) yield curves usually slope upward. 
B) interest rates on bonds of different maturities move together. 
C) long-term interest rates are less volatile than short term interest rates. 
D) yield curves are flat.

Question 4

The risk spread:

Accepted Answer

A) is also known as the default-risk premium. 
B) should have a direct relationship with the bond's price. 
C) should have an inverse relationship with the bond's yield. 
D) is always constant. 
A) is also known as the default-risk premium. 
B) should have a direct relationship with the bond's price. 
C) should have an inverse relationship with the bond's yield. 
D) is always constant.

Question 5

If a bond's rating improves, we would expect:

Accepted Answer

A) the demand for this bond to increase, all other factors constant. 
B) the demand for and the yield of this bond to increase, all other factors constant. 
C) the demand for this bond to decrease, and its yield to increase, all other factors constant. 
D) both the demand for and the price of the bond to decrease, all other factors constant. 
A) the demand for this bond to increase, all other factors constant. 
B) the demand for and the yield of this bond to increase, all other factors constant. 
C) the demand for this bond to decrease, and its yield to increase, all other factors constant. 
D) both the demand for and the price of the bond to decrease, all other factors constant.

Question 6

At the beginning of 2006 the yield curve was usually flat, and sometimes downward sloping (inverted).This raised concerns that a recession might be on the way.But the slope of the yield curve is only part of the story.What else is important?

Accepted Answer

A recession is associated both with an i

Question 7

During a recession you would expect the difference between the commercial paper rate and the yield on U.S.T-bills of the same maturity to:

Accepted Answer

A) be the same since their maturities are the same. 
B) increase reflecting the possibility of higher default risk for commercial paper. 
C) decrease. 
D) fluctuate rarely. 
A) be the same since their maturities are the same. 
B) increase reflecting the possibility of higher default risk for commercial paper. 
C) decrease. 
D) fluctuate rarely.

Question 8

The paper-bill spread refers to the interest rate spread between commercial paper and Treasury bills with the same maturity.Is this a risk spread or a term spread? How do you expect the paper-bill spread is related to GDP growth? What is the intuition for this result? What does this imply about the yield curve?

Accepted Answer

This is a risk spread because it compare

Question 9

If a one-year bond currently yields 4% and is expected to yield 6% next year, the Liquidity Premium Theory suggests the yield today on a two-year bond will be:

Accepted Answer

A) More than 4% but less than 5%. 
B) 5%. 
C) 4%. 
D) More than 5%. 
A) More than 4% but less than 5%. 
B) 5%. 
C) 4%. 
D) More than 5%.

Question 10

The yield on a 30-year U.S.Treasury security is 6.5%; the yield on a 2-year U.S.Treasury bond is 4.0%.This data indicate:

Accepted Answer

A) the yield curve is downward sloping. 
B) the yield curve is flat since the risk premium needs to be added for longer maturities. 
C) the yield curve is upward sloping. 
D) that people expect inflation to decrease in the future. 
A) the yield curve is downward sloping. 
B) the yield curve is flat since the risk premium needs to be added for longer maturities. 
C) the yield curve is upward sloping. 
D) that people expect inflation to decrease in the future.

Question 11

An investor in a 30% marginal tax bracket, earning $10 in interest annually for a $100 U.S.Treasury bond:

Accepted Answer

A) earns a 10% after-tax return because interest on U.S.Treasury bonds is tax exempt at the federal level. 
B) earns a 3% return after-tax. 
C) would be indifferent between this bond and a municipal bond offering $7 annually per $100 of face value, assuming the same default risk and liquidity characteristics. 
D) earns a 1% return after-tax. 
A) earns a 10% after-tax return because interest on U.S.Treasury bonds is tax exempt at the federal level. 
B) earns a 3% return after-tax. 
C) would be indifferent between this bond and a municipal bond offering $7 annually per $100 of face value, assuming the same default risk and liquidity characteristics. 
D) earns a 1% return after-tax.

Question 12

Bonds issued by the U.S.Treasury are referred to as benchmark bonds because:

Accepted Answer

A) they are always purchased for a premium. 
B) they are highly liquid and virtually free of default risk. 
C) all bonds from national governments are labeled as benchmark bonds. 
D) all bonds from the U.S.government have the same rate of interest. 
A) they are always purchased for a premium. 
B) they are highly liquid and virtually free of default risk. 
C) all bonds from national governments are labeled as benchmark bonds. 
D) all bonds from the U.S.government have the same rate of interest.

Question 13

The yield on a tax-exempt bond:

Accepted Answer

A) equals the taxable bond yield times one minus the tax rate. 
B) is equal to the yield on a U.S.30-year bond. 
C) is called the risk-free yield. 
D) only applies to foreign bonds because they are exempt from U.S.income taxes. 
A) equals the taxable bond yield times one minus the tax rate. 
B) is equal to the yield on a U.S.30-year bond. 
C) is called the risk-free yield. 
D) only applies to foreign bonds because they are exempt from U.S.income taxes.

Question 14

Suppose the tax rate is 25% and the taxable bond yield is 8%.What is the equivalent tax-exempt bond yield?

Accepted Answer

A) 2% 
B) 2.3% 
C) 6% 
D) 6.9% 
A) 2% 
B) 2.3% 
C) 6% 
D) 6.9%

Question 15

The risk spread is:

Accepted Answer

A) the difference between a bond's purchase price and selling price. 
B) the difference between the bond's yield and the yield on a U.S.Treasury bond of the same maturity. 
C) less than 0 (zero) for a U.S.Treasury bond. 
D) assigned by a bond-rating agency. 
A) the difference between a bond's purchase price and selling price. 
B) the difference between the bond's yield and the yield on a U.S.Treasury bond of the same maturity. 
C) less than 0 (zero) for a U.S.Treasury bond. 
D) assigned by a bond-rating agency.

Question 16

Municipal bonds are usually purchased by:

Accepted Answer

A) retired investors who have no other taxable income. 
B) investors looking for securities to buy for their IRA accounts. 
C) investors who live in cities with high municipal tax rates. 
D) investors who are in high marginal tax brackets. 
A) retired investors who have no other taxable income. 
B) investors looking for securities to buy for their IRA accounts. 
C) investors who live in cities with high municipal tax rates. 
D) investors who are in high marginal tax brackets.

Question 17

According to the Expectations Theory of the term structure, if interest rates are expected to be 2%, 2%, 4%, and 5% over the next four years, which yield is the closest to the yield on a three-year bond today?

Accepted Answer

A) 2.7% 
B) 4% 
C) 4.3% 
D) 8% 
A) 2.7% 
B) 4% 
C) 4.3% 
D) 8%

Question 18

In the fall of 1998 we saw an increase in the risk spread because:

Accepted Answer

A) the risk spread always increases as we approach the end of the year. 
B) the Russian government defaulted on some of its bonds. 
C) there was an extraordinarily large amount of corporate fraud being reported in 1998. 
D) there was a significant increase in U.S.income tax rates. 
A) the risk spread always increases as we approach the end of the year. 
B) the Russian government defaulted on some of its bonds. 
C) there was an extraordinarily large amount of corporate fraud being reported in 1998. 
D) there was a significant increase in U.S.income tax rates.

Question 19

Most commercial paper is:

Accepted Answer

A) issued with maturities exceeding one year. 
B) issued with maturities between 50 and 75 days. 
C) used exclusively for short-term financing needs. 
D) issued by foreign companies doing business in the United States. 
A) issued with maturities exceeding one year. 
B) issued with maturities between 50 and 75 days. 
C) used exclusively for short-term financing needs. 
D) issued by foreign companies doing business in the United States.

Question 20

The slope of the yield curve seems to predict the performance of the economy usually:

Accepted Answer

A) with a 3-month lag. 
B) with a one-year lag. 
C) within a few weeks. 
D) with a two-year lag. 
A) with a 3-month lag. 
B) with a one-year lag. 
C) within a few weeks. 
D) with a two-year lag.

Exam 7: The Risk and Term Structure of Interest Rates

Municipal bonds are issued by:

Assume the Expectations Hypothesis regarding the term structure of interest rates is correct.If the current one-year interest rate is 3% and the one-year-ahead expected one-year interest rate is 5%, then the current two-year interest rate should be:

The addition of the Liquidity Premium Theory to the Expectations Hypothesis allows us to explain why:

The risk spread:

If a bond's rating improves, we would expect:

At the beginning of 2006 the yield curve was usually flat, and sometimes downward sloping (inverted).This raised concerns that a recession might be on the way.But the slope of the yield curve is only part of the story.What else is important?

During a recession you would expect the difference between the commercial paper rate and the yield on U.S.T-bills of the same maturity to:

If a one-year bond currently yields 4% and is expected to yield 6% next year, the Liquidity Premium Theory suggests the yield today on a two-year bond will be:

The yield on a 30-year U.S.Treasury security is 6.5%; the yield on a 2-year U.S.Treasury bond is 4.0%.This data indicate:

An investor in a 30% marginal tax bracket, earning $10 in interest annually for a $100 U.S.Treasury bond:

Bonds issued by the U.S.Treasury are referred to as benchmark bonds because:

The yield on a tax-exempt bond:

Suppose the tax rate is 25% and the taxable bond yield is 8%.What is the equivalent tax-exempt bond yield?

The risk spread is:

Municipal bonds are usually purchased by:

According to the Expectations Theory of the term structure, if interest rates are expected to be 2%, 2%, 4%, and 5% over the next four years, which yield is the closest to the yield on a three-year bond today?

In the fall of 1998 we saw an increase in the risk spread because:

Most commercial paper is:

The slope of the yield curve seems to predict the performance of the economy usually:

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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