Question 1

Which of the following is true?

Accepted Answer

A) Long-term bond yields move together but short-term yields do not. 
B) Short-term bond yields move together but long-term yields do not. 
C) U.S.Treasury bill yields are lower than the yields on commercial paper. 
D) Long-term bond yields are usually the same as short-term yields. 
A) Long-term bond yields move together but short-term yields do not. 
B) Short-term bond yields move together but long-term yields do not. 
C) U.S.Treasury bill yields are lower than the yields on commercial paper. 
D) Long-term bond yields are usually the same as short-term yields.

Question 2

Investors usually obtain bond ratings from:

Accepted Answer

A) private bond-rating agencies. 
B) the annual tax returns of the issuer. 
C) the U.S.government from publicly available information. 
D) public information made available by the bond issuers. 
A) private bond-rating agencies. 
B) the annual tax returns of the issuer. 
C) the U.S.government from publicly available information. 
D) public information made available by the bond issuers.

Question 3

Which fact about the term structure is the Expectations Theory able to explain?

Accepted Answer

A) Why interest rates on bonds with different terms to maturity tend to move together over time. 
B) Why yields on short-term bonds are more volatile than yields on long-term bonds. 
C) Why longer-term yields tend to be higher than shorter-term yields. 
D) Why long-term bonds usually are less liquid than short-term bonds with the same default risk. 
A) Why interest rates on bonds with different terms to maturity tend to move together over time. 
B) Why yields on short-term bonds are more volatile than yields on long-term bonds. 
C) Why longer-term yields tend to be higher than shorter-term yields. 
D) Why long-term bonds usually are less liquid than short-term bonds with the same default risk.

Question 4

Describe the concept of flight to quality in terms of the Russian government default of August 1998.

Accepted Answer

The concept of flight to quality implies

Question 5

Which of the following statements pertaining to the yield curve is not true?

Accepted Answer

A) Yield curves usually slope upwards. 
B) The yield curve shows the difference in default risk between securities. 
C) The yield curve shows the relationship among bonds with the same risk characteristics but different maturities. 
D) The yield curve can be flat or downward sloping depending on market conditions. 
A) Yield curves usually slope upwards. 
B) The yield curve shows the difference in default risk between securities. 
C) The yield curve shows the relationship among bonds with the same risk characteristics but different maturities. 
D) The yield curve can be flat or downward sloping depending on market conditions.

Question 6

The Expectations Hypothesis assumes:

Accepted Answer

A) a high level of uncertainty regarding the future of long-term yields. 
B) investors know the yields on bonds today and form expectations of the yields on short-term bonds in future time periods. 
C) securities of different maturities are not perfect substitutes for each other. 
D) the risk premium increases with longer maturities. 
A) a high level of uncertainty regarding the future of long-term yields. 
B) investors know the yields on bonds today and form expectations of the yields on short-term bonds in future time periods. 
C) securities of different maturities are not perfect substitutes for each other. 
D) the risk premium increases with longer maturities.

Question 7

Why do economists pay particular attention to inverted yield curves?

Accepted Answer

Inverted yield curves can be h

Question 8

We would expect the risk spread between Baa bonds and U.S.Treasury securities of the same maturities to:

Accepted Answer

A) widen during periods of economic recession. 
B) remain relatively constant over the business cycle. 
C) decrease during economic slowdowns. 
D) increase during economic growth periods. 
A) widen during periods of economic recession. 
B) remain relatively constant over the business cycle. 
C) decrease during economic slowdowns. 
D) increase during economic growth periods.

Question 9

The interest-rate risk that is associated with bond investing:

Accepted Answer

A) exists even if an investor plans on holding the bond to maturity. 
B) arises because of a mismatch between the investor's investment horizon and the maturity of the bond. 
C) is not reflected in the risk premium. 
D) can be eliminated by holding only consols. 
A) exists even if an investor plans on holding the bond to maturity. 
B) arises because of a mismatch between the investor's investment horizon and the maturity of the bond. 
C) is not reflected in the risk premium. 
D) can be eliminated by holding only consols.

Question 10

Bonds rated as "highly speculative" are:

Accepted Answer

A) rated so because they guarantee high returns for the buyer. 
B) commonly referred to as junk bonds. 
C) ranked just above investment grade by Standard & Poor's. 
D) rated so because they do not have any default risk. 
A) rated so because they guarantee high returns for the buyer. 
B) commonly referred to as junk bonds. 
C) ranked just above investment grade by Standard & Poor's. 
D) rated so because they do not have any default risk.

Question 11

Interest on most bonds issued by states is usually exempt from:

Accepted Answer

A) state income tax but not federal. 
B) from federal income tax but not state. 
C) both state and federal income taxes. 
D) from city income taxes. 
A) state income tax but not federal. 
B) from federal income tax but not state. 
C) both state and federal income taxes. 
D) from city income taxes.

Question 12

According to the Expectations Hypothesis, if investors believed that, for a given holding period, the average of the expected future short-term yields was greater than the long-term yield for the holding period, they would act so as to drive:

Accepted Answer

A) down the price of the short-term bond and drive up the price of the long-term bond. 
B) up the price of the short-term bond and drive down the price of the long-term bond. 
C) up the prices of both the short- and long-term bonds. 
D) down the prices of both the short- and long-term bonds. 
A) down the price of the short-term bond and drive up the price of the long-term bond. 
B) up the price of the short-term bond and drive down the price of the long-term bond. 
C) up the prices of both the short- and long-term bonds. 
D) down the prices of both the short- and long-term bonds.

Question 13

A flight to quality should result in the:

Accepted Answer

A) price of U.S.Treasury Securities rising and the price of corporate bonds rising. 
B) yield on U.S.Treasury Securities falling and the price of corporate bonds rising. 
C) yield on corporate bonds falling and the price of U.S.Treasury Securities rising. 
D) yield on U.S.Treasury securities falling and the price of corporate bonds falling. 
A) price of U.S.Treasury Securities rising and the price of corporate bonds rising. 
B) yield on U.S.Treasury Securities falling and the price of corporate bonds rising. 
C) yield on corporate bonds falling and the price of U.S.Treasury Securities rising. 
D) yield on U.S.Treasury securities falling and the price of corporate bonds falling.

Question 14

The lowest rating for an investment grade bond assigned by Moody's is:

Accepted Answer

A) Baa. 
B) A. 
C) BBB. 
D) Aa. 
A) Baa. 
B) A. 
C) BBB. 
D) Aa.

Question 15

A borrower who has to pay an interest rate of 8% rather than 6% due to risk spread will pay:

Accepted Answer

A) $20 more in interest annually for every $100 borrowed. 
B) 33.3% higher interest in dollar terms. 
C) 2% in net interest. 
D) less interest in total over the life of the loan. 
A) $20 more in interest annually for every $100 borrowed. 
B) 33.3% higher interest in dollar terms. 
C) 2% in net interest. 
D) less interest in total over the life of the loan.

Question 16

Tax-exempt bonds:

Accepted Answer

A) generate higher returns for the bondholder when purchased through a tax-exempt retirement account. 
B) are not affected by changes in yields on taxable bonds. 
C) are most beneficial to those who pay higher income tax rates. 
D) include U.S.Treasury securities because the Internal Revenue Service does not charge income tax on interest earned from these bonds. 
A) generate higher returns for the bondholder when purchased through a tax-exempt retirement account. 
B) are not affected by changes in yields on taxable bonds. 
C) are most beneficial to those who pay higher income tax rates. 
D) include U.S.Treasury securities because the Internal Revenue Service does not charge income tax on interest earned from these bonds.

Question 17

When we compare the graphs of GDP growth over time to the corresponding risk spread on Baa bonds compared to 10-year U.S.Treasury bonds, what relationship can be inferred?

Accepted Answer

There seems to be an inverse r

Question 18

Suppose the economy has an inverted yield curve.According to the Expectations Hypothesis, which of the following interpretations could be used to explain this?

Accepted Answer

A) Interest rates are expected to fall in the future. 
B) Investors prefer bonds with less default risk. 
C) Investors prefer bonds with less interest-rate risk. 
D) The term spread is positive. 
A) Interest rates are expected to fall in the future. 
B) Investors prefer bonds with less default risk. 
C) Investors prefer bonds with less interest-rate risk. 
D) The term spread is positive.

Question 19

We would expect the relationship between the risk spread on Baa bonds and U.S.Treasury securities of similar maturities to:

Accepted Answer

A) vary directly with economic growth. 
B) show no variation over the business cycle. 
C) vary inversely with economic growth. 
D) be uncorrelated with economic growth. 
A) vary directly with economic growth. 
B) show no variation over the business cycle. 
C) vary inversely with economic growth. 
D) be uncorrelated with economic growth.

Question 20

When the growth rate of the economy slows we would expect:

Accepted Answer

A) the risk to increase for U.S.Treasury securities. 
B) the risk spread to increase more between U.S.Treasury Securities and Aaa securities than between Aaa and Baa securities. 
C) the risk spread to increase more between Aaa and Baa securities than U.S.Treasuries and Aaa securities. 
D) investors to purchase more junk bonds in search of a higher yield. 
A) the risk to increase for U.S.Treasury securities. 
B) the risk spread to increase more between U.S.Treasury Securities and Aaa securities than between Aaa and Baa securities. 
C) the risk spread to increase more between Aaa and Baa securities than U.S.Treasuries and Aaa securities. 
D) investors to purchase more junk bonds in search of a higher yield.

Exam 7: The Risk and Term Structure of Interest Rates

Which of the following is true?

Investors usually obtain bond ratings from:

Which fact about the term structure is the Expectations Theory able to explain?

Describe the concept of flight to quality in terms of the Russian government default of August 1998.

Which of the following statements pertaining to the yield curve is not true?

The Expectations Hypothesis assumes:

Why do economists pay particular attention to inverted yield curves?

We would expect the risk spread between Baa bonds and U.S.Treasury securities of the same maturities to:

The interest-rate risk that is associated with bond investing:

Bonds rated as "highly speculative" are:

Interest on most bonds issued by states is usually exempt from:

According to the Expectations Hypothesis, if investors believed that, for a given holding period, the average of the expected future short-term yields was greater than the long-term yield for the holding period, they would act so as to drive:

A flight to quality should result in the:

The lowest rating for an investment grade bond assigned by Moody's is:

A borrower who has to pay an interest rate of 8% rather than 6% due to risk spread will pay:

Tax-exempt bonds:

When we compare the graphs of GDP growth over time to the corresponding risk spread on Baa bonds compared to 10-year U.S.Treasury bonds, what relationship can be inferred?

Suppose the economy has an inverted yield curve.According to the Expectations Hypothesis, which of the following interpretations could be used to explain this?

We would expect the relationship between the risk spread on Baa bonds and U.S.Treasury securities of similar maturities to:

When the growth rate of the economy slows we would expect:

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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