Question 1

Under the Expectations Hypothesis, bonds of different maturities are assumed to be perfect substitutes because:

Accepted Answer

A) the risk premium is assumed to be negative. 
B) market forces would always have long-term interest rates equal the average of the current and expected short-term rate. 
C) expectations of future interest rates are uncertain and therefore cannot be included in the analysis. 
D) bond markets are very liquid. 
A) the risk premium is assumed to be negative. 
B) market forces would always have long-term interest rates equal the average of the current and expected short-term rate. 
C) expectations of future interest rates are uncertain and therefore cannot be included in the analysis. 
D) bond markets are very liquid.

Question 2

Suppose that the Federal Reserve is concerned about rising inflation, so they increase short-term interest rates.How will this affect long-term rates and the yield curve? What does the slope of the yield curve reveal about the effectiveness of the Fed's policy? Explain in the context of the Liquidity Premium Theory.

Accepted Answer

The increase in the short-term rate may

Question 3

What role did rating agencies play in the financial crisis of 2007-2009?

Accepted Answer

Rating errors on mortgage-backed securit

Question 4

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

Accepted Answer

A) Interest rates are expected to rise in the future. 
B) Investors expect an economic slowdown. 
C) Investors are indifferent between bonds with different time horizons. 
D) The term spread has increased. 
A) Interest rates are expected to rise in the future. 
B) Investors expect an economic slowdown. 
C) Investors are indifferent between bonds with different time horizons. 
D) The term spread has increased.

Question 5

Assume the Expectation Hypothesis regarding the term structure of interest rates is correct.Then, if the current one-year interest rate is 4% and the two-year interest rate is 6%, then investors are expecting the future one-year rate to be:

Accepted Answer

A) 4%. 
B) 8%. 
C) 6%. 
D) 5%. 
A) 4%. 
B) 8%. 
C) 6%. 
D) 5%.

Question 6

A proposed increase in the federal income tax rate should:

Accepted Answer

A) have no impact on the slope of the yield curve since the tax laws impact all maturities the same. 
B) cause the slope of the yield curve to become negative. 
C) increase the slope of the yield curve since it increases the risk premium of longer maturities. 
D) flatten the yield curve. 
A) have no impact on the slope of the yield curve since the tax laws impact all maturities the same. 
B) cause the slope of the yield curve to become negative. 
C) increase the slope of the yield curve since it increases the risk premium of longer maturities. 
D) flatten the yield curve.

Question 7

How did asset backed commercial paper (ABCP) rollover risk contribute to the financial crisis of 2007-2009?

Accepted Answer

ABCP creates a mismatch between the long

Question 8

In 2002 and 2003, the financial markets were hit by many corporate accounting scandals.Discuss these scandals and the impact they would have not only in terms of a flight to quality, but also in terms of the faith that people place in bond rating agencies.

Accepted Answer

The corporate accounting scandals certai

Question 9

If the federal government replaced the current income tax with a national sales tax, the price of:

Accepted Answer

A) corporate bonds and municipal bonds would rise. 
B) municipal bonds would rise and corporate bonds would not change. 
C) corporate bonds would fall while the price of municipal bonds would rise. 
D) municipal bonds would fall while the price of corporate bonds would rise. 
A) corporate bonds and municipal bonds would rise. 
B) municipal bonds would rise and corporate bonds would not change. 
C) corporate bonds would fall while the price of municipal bonds would rise. 
D) municipal bonds would fall while the price of corporate bonds would rise.

Question 10

Commercial paper refers to:

Accepted Answer

A) the financial publications read by the CEO's of public corporations. 
B) any debt security with a maturity exceeding one year. 
C) short-term collateralized securities issued only by corporations. 
D) unsecured short-term debt issued by corporations and governments. 
A) the financial publications read by the CEO's of public corporations. 
B) any debt security with a maturity exceeding one year. 
C) short-term collateralized securities issued only by corporations. 
D) unsecured short-term debt issued by corporations and governments.

Question 11

Which fact about the term structure is the Expectations Theory unable 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 bond yields are influenced by expected future short-term bond yields. 
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 bond yields are influenced by expected future short-term bond yields.

Question 12

The default-risk premium:

Accepted Answer

A) is negative for a U.S.Treasury bond. 
B) is also known as the risk spread. 
C) must always be greater than 0 (zero). 
D) is assigned by a bond-rating agency. 
A) is negative for a U.S.Treasury bond. 
B) is also known as the risk spread. 
C) must always be greater than 0 (zero). 
D) is assigned by a bond-rating agency.

Question 13

Which of the following is not typically used for qualifying mortgages as prime or subprime?

Accepted Answer

A) The borrower's income 
B) The borrower's credit score 
C) The borrower's ethnicity 
D) The loan to value ratio 
A) The borrower's income 
B) The borrower's credit score 
C) The borrower's ethnicity 
D) The loan to value ratio

Question 14

When the Russian government defaulted on its bonds in August 1998:

Accepted Answer

A) risk spreads decreased significantly. 
B) yields on U.S.Treasury securities fell while yields on corporate bonds rose. 
C) yields on U.S.Treasury securities rose while prices of corporate bonds rose. 
D) risk spreads did not change. 
A) risk spreads decreased significantly. 
B) yields on U.S.Treasury securities fell while yields on corporate bonds rose. 
C) yields on U.S.Treasury securities rose while prices of corporate bonds rose. 
D) risk spreads did not change.

Question 15

The Expectations Hypothesis suggests the:

Accepted Answer

A) yield curve should usually be downward sloping. 
B) yield curve should usually be upward sloping. 
C) slope of the yield curve reflects the risk premium associated with longer-term bonds. 
D) slope of the yield curve depends on the expectations for future short-term rates. 
A) yield curve should usually be downward sloping. 
B) yield curve should usually be upward sloping. 
C) slope of the yield curve reflects the risk premium associated with longer-term bonds. 
D) slope of the yield curve depends on the expectations for future short-term rates.

Question 16

Holding liquidity and default risk constant, an investor earning 4% from a tax-exempt bond who is in a 20% tax bracket would be indifferent between that bond and a taxable bone with a(n):

Accepted Answer

A) 7.5% yield. 
B) 8.0% yield. 
C) 5% yield. 
D) 6% yield. 
A) 7.5% yield. 
B) 8.0% yield. 
C) 5% yield. 
D) 6% yield.

Question 17

Which of the following statements is not true of the yield curve for U.S.Treasury securities?

Accepted Answer

A) The yield curve usually slopes upward. 
B) The yield curve usually is inverted. 
C) The yield curve shows the relationship among securities of different maturities. 
D) The yield curve can shift over time. 
A) The yield curve usually slopes upward. 
B) The yield curve usually is inverted. 
C) The yield curve shows the relationship among securities of different maturities. 
D) The yield curve can shift over time.

Question 18

Under the Liquidity Premium Theory, if investors expect short-term interest rates to remain constant, the yield curve should:

Accepted Answer

A) have a positive slope. 
B) have a negative slope. 
C) be flat. 
D) have an increasing slope. 
A) have a positive slope. 
B) have a negative slope. 
C) be flat. 
D) have an increasing slope.

Question 19

Assuming the Expectations Hypothesis is correct, and given the following information:
The current four-year interest rate is 5.0%
The current one-year interest rate is 4.0%
The expected one-year rate for one year from now is 5.0%
The expected one-year rate for two years from now is 5.5%
What is the expected one-year rate for three years from now? Explain.

Accepted Answer

The general statement of the Expectation

Question 20

The risk spread on bonds fluctuates mainly because:

Accepted Answer

A) taxes tend to increase over time. 
B) bond rating agencies are often inconsistent. 
C) new information about a borrower's financial condition becomes available. 
D) people do not change their attitudes towards risk quickly. 
A) taxes tend to increase over time. 
B) bond rating agencies are often inconsistent. 
C) new information about a borrower's financial condition becomes available. 
D) people do not change their attitudes towards risk quickly.

Exam 7: The Risk and Term Structure of Interest Rates

Under the Expectations Hypothesis, bonds of different maturities are assumed to be perfect substitutes because:

What role did rating agencies play in the financial crisis of 2007-2009?

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

Assume the Expectation Hypothesis regarding the term structure of interest rates is correct.Then, if the current one-year interest rate is 4% and the two-year interest rate is 6%, then investors are expecting the future one-year rate to be:

A proposed increase in the federal income tax rate should:

How did asset backed commercial paper (ABCP) rollover risk contribute to the financial crisis of 2007-2009?

In 2002 and 2003, the financial markets were hit by many corporate accounting scandals.Discuss these scandals and the impact they would have not only in terms of a flight to quality, but also in terms of the faith that people place in bond rating agencies.

If the federal government replaced the current income tax with a national sales tax, the price of:

Commercial paper refers to:

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

The default-risk premium:

Which of the following is not typically used for qualifying mortgages as prime or subprime?

When the Russian government defaulted on its bonds in August 1998:

The Expectations Hypothesis suggests the:

Holding liquidity and default risk constant, an investor earning 4% from a tax-exempt bond who is in a 20% tax bracket would be indifferent between that bond and a taxable bone with a(n):

Which of the following statements is not true of the yield curve for U.S.Treasury securities?

Under the Liquidity Premium Theory, if investors expect short-term interest rates to remain constant, the yield curve should:

The risk spread on bonds fluctuates mainly because:

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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