Question 1

The term structure is usually defined with yields on which securities?

Accepted Answer

A) corporate bonds 
B) commercial paper 
C) U)S. Treasury securities 
D) municipal bonds 
A) corporate bonds 
B) commercial paper 
C) U)S. Treasury securities 
D) municipal bonds

Question 2

If the three-month Treasury bill has an interest rate of 0.2%, the ten-tear Treasury bond has an interest rate of 2.75%, and a ten-year bond issued by Time Warner has an interest rate of 6%, what is the risk premium on Time Warner's bond?

Accepted Answer

The risk p

Question 3

During the financial crisis of 2007-2009,

Accepted Answer

A) mortgage-backed securities became more liquid. 
B) information costs of mortgage-backed securities rose. 
C) information costs of mortgage-backed securities declined. 
D) the tax treatment of mortgage-backed securities was changed. 
A) mortgage-backed securities became more liquid. 
B) information costs of mortgage-backed securities rose. 
C) information costs of mortgage-backed securities declined. 
D) the tax treatment of mortgage-backed securities was changed.

Question 4

A bond that is generally agreed to have higher default risk will experience all of the following EXCEPT:

Accepted Answer

A) declining demand 
B) declining supply 
C) higher yield 
D) lower price 
A) declining demand 
B) declining supply 
C) higher yield 
D) lower price

Question 5

Unlike the segmented markets theory, the expectations theory attributes the slope of the yield curve to

Accepted Answer

A) tax considerations. 
B) the fact that short-term bonds are not perfect substitutes for long-term bonds. 
C) the market's view of future short-term interest rates. 
D) the variance in the inflation rates over the business cycle. 
A) tax considerations. 
B) the fact that short-term bonds are not perfect substitutes for long-term bonds. 
C) the market's view of future short-term interest rates. 
D) the variance in the inflation rates over the business cycle.

Question 6

In late 2012, President Obama proposed raising the top income tax rate. All of the following are likely impacts of higher income tax rates on bonds EXCEPT:

Accepted Answer

A) higher interest rates on Treasury bonds 
B) lower interest rates on Municipal bonds 
C) increased demand for Municipal bonds 
D) lower prices for Municipal bonds 
A) higher interest rates on Treasury bonds 
B) lower interest rates on Municipal bonds 
C) increased demand for Municipal bonds 
D) lower prices for Municipal bonds

Question 7

A one-year bond has an interest rate of 0.2% and is expected to rise to 0.5% next year and 1.1% in two years. The term premium for a two-year bond is 0.1% and for a three-year bond is 0.25%. What are the interest rates on a two-year bond and three-year bond according to the liquidity premium theory?

Accepted Answer

A two-year bond will have an i

Question 8

Which of the following statements about junk bonds is false?

Accepted Answer

A) Given the likelihood of default, it is never profitable to purchase junk bonds. 
B) They pay higher interest rates than investment grade bonds due to higher perceived risk. 
C) Prior to the 1970s, corporations were unable to issue junk bonds. 
D) A popular measure of junk bond yields reached a record low in 2012. 
A) Given the likelihood of default, it is never profitable to purchase junk bonds. 
B) They pay higher interest rates than investment grade bonds due to higher perceived risk. 
C) Prior to the 1970s, corporations were unable to issue junk bonds. 
D) A popular measure of junk bond yields reached a record low in 2012.

Question 9

U)S. Treasury securities

Accepted Answer

A) are considered risk free because their prices never change. 
B) have been defaulted on several time in U.S. history. 
C) are considered default-risk-free instruments. 
D) have a large default risk premium. 
A) are considered risk free because their prices never change. 
B) have been defaulted on several time in U.S. history. 
C) are considered default-risk-free instruments. 
D) have a large default risk premium.

Question 10

The term structure of interest rates

Accepted Answer

A) represents the relationship among the interest rates on bonds that are otherwise similar but that have different maturities. 
B) reflects differing tax treatment received by different instruments. 
C) always results in an upward-sloping yield curve. 
D) usually results in a downward-sloping yield curve. 
A) represents the relationship among the interest rates on bonds that are otherwise similar but that have different maturities. 
B) reflects differing tax treatment received by different instruments. 
C) always results in an upward-sloping yield curve. 
D) usually results in a downward-sloping yield curve.

Question 11

The key assumption of the liquidity premium theory is that investors

Accepted Answer

A) view bonds of different maturities as perfect substitutes. 
B) view bonds of different maturities as completely unsubstitutable. 
C) always choose the bond with the highest expected return, regardless of maturity. 
D) care about both expected returns and time to maturity. 
A) view bonds of different maturities as perfect substitutes. 
B) view bonds of different maturities as completely unsubstitutable. 
C) always choose the bond with the highest expected return, regardless of maturity. 
D) care about both expected returns and time to maturity.

Question 12

Under the liquidity premium theory, a flat yield curve indicates that investors expect future short-term rates to

Accepted Answer

A) fall. 
B) rise. 
C) remain constant. 
D) either fall or remain constant. 
A) fall. 
B) rise. 
C) remain constant. 
D) either fall or remain constant.

Question 13

Situations of negative interest rates on short-term bonds resulted from:

Accepted Answer

A) high income tax rates 
B) government regulations requiring financial firms to purchase government bonds 
C) very low risk premiums 
D) investors were looking for safe havens when other investments were perceived to be very risky 
A) high income tax rates 
B) government regulations requiring financial firms to purchase government bonds 
C) very low risk premiums 
D) investors were looking for safe havens when other investments were perceived to be very risky

Question 14

Which of the following statements about junk (high-risk)bonds is true?

Accepted Answer

A) They never outperform treasury bonds since they're too risky. 
B) The price of junk bonds increase as their perceived risk increases. 
C) They tend to perform best during recessions. 
D) One can profit by owning them if market perceptions of their risk decline. 
A) They never outperform treasury bonds since they're too risky. 
B) The price of junk bonds increase as their perceived risk increases. 
C) They tend to perform best during recessions. 
D) One can profit by owning them if market perceptions of their risk decline.

Question 15

The risk structure of interest rates refers to

Accepted Answer

A) the amount of additional interest necessary to compensate savers for the greater risk of default on some bonds. 
B) the relationship among the interest rates on similar bonds with different maturities. 
C) the relationship among the interest rates on bonds with the same maturity. 
D) the amount of additional yield necessary to compensate savers for the lesser liquidity of some bonds. 
A) the amount of additional interest necessary to compensate savers for the greater risk of default on some bonds. 
B) the relationship among the interest rates on similar bonds with different maturities. 
C) the relationship among the interest rates on bonds with the same maturity. 
D) the amount of additional yield necessary to compensate savers for the lesser liquidity of some bonds.

Question 16

Investors often pay professional analysts to gather and monitor information on the creditworthiness of borrowers because

Accepted Answer

A) federal law requires it. 
B) most investors are risk neutral. 
C) the cost of acquiring information about a borrower's creditworthiness can be high. 
D) doing so increases the net-of-tax yield on most investments. 
A) federal law requires it. 
B) most investors are risk neutral. 
C) the cost of acquiring information about a borrower's creditworthiness can be high. 
D) doing so increases the net-of-tax yield on most investments.

Question 17

The default risk premium fluctuates mainly

Accepted Answer

A) because bond rating agencies tend to be inconsistent in their ratings of bonds. 
B) because risk-neutral investors will often become risk-averse as time passes. 
C) because taxes tend to rise over the long run. 
D) as new information about a borrower's creditworthiness becomes available. 
A) because bond rating agencies tend to be inconsistent in their ratings of bonds. 
B) because risk-neutral investors will often become risk-averse as time passes. 
C) because taxes tend to rise over the long run. 
D) as new information about a borrower's creditworthiness becomes available.

Question 18

Currently, a three-year Treasury note pays 4.75%. Assuming that your tax rate is 20%, what is the minimum interest rate that you would you need to earn on a tax-free municipal bond in order to buy it instead?

Accepted Answer

A) 0)95% 
B) 3)8% 
C) 5)7% 
D) 15.25% 
A) 0)95% 
B) 3)8% 
C) 5)7% 
D) 15.25%

Question 19

Default risk arises from the fact that

Accepted Answer

A) borrowers differ in their ability to repay in full the principal and interest required by a loan agreement. 
B) the bond price drops when interest rates rise. 
C) it is inherently riskier to wait for a capital gain than to receive an immediate interest payment. 
D) interest rates are far more likely to go up than to go down. 
A) borrowers differ in their ability to repay in full the principal and interest required by a loan agreement. 
B) the bond price drops when interest rates rise. 
C) it is inherently riskier to wait for a capital gain than to receive an immediate interest payment. 
D) interest rates are far more likely to go up than to go down.

Question 20

The expectations theory

Accepted Answer

A) has difficulty explaining why U.S. Treasury securities have lower yields than corporate bonds. 
B) has difficulty explaining why yields on bonds of different maturities move together. 
C) has difficulty explaining why yield curves usually slope upward. 
D) accounts well for the fact that yield curves usually slope upward. 
A) has difficulty explaining why U.S. Treasury securities have lower yields than corporate bonds. 
B) has difficulty explaining why yields on bonds of different maturities move together. 
C) has difficulty explaining why yield curves usually slope upward. 
D) accounts well for the fact that yield curves usually slope upward.

The term structure is usually defined with yields on which securities?

If the three-month Treasury bill has an interest rate of 0.2%, the ten-tear Treasury bond has an interest rate of 2.75%, and a ten-year bond issued by Time Warner has an interest rate of 6%, what is the risk premium on Time Warner's bond?

During the financial crisis of 2007-2009,

A bond that is generally agreed to have higher default risk will experience all of the following EXCEPT:

Unlike the segmented markets theory, the expectations theory attributes the slope of the yield curve to

In late 2012, President Obama proposed raising the top income tax rate. All of the following are likely impacts of higher income tax rates on bonds EXCEPT:

A one-year bond has an interest rate of 0.2% and is expected to rise to 0.5% next year and 1.1% in two years. The term premium for a two-year bond is 0.1% and for a three-year bond is 0.25%. What are the interest rates on a two-year bond and three-year bond according to the liquidity premium theory?

Which of the following statements about junk bonds is false?

U)S. Treasury securities

The term structure of interest rates

The key assumption of the liquidity premium theory is that investors

Under the liquidity premium theory, a flat yield curve indicates that investors expect future short-term rates to

Situations of negative interest rates on short-term bonds resulted from:

Which of the following statements about junk (high-risk)bonds is true?

The risk structure of interest rates refers to

Investors often pay professional analysts to gather and monitor information on the creditworthiness of borrowers because

The default risk premium fluctuates mainly

Currently, a three-year Treasury note pays 4.75%. Assuming that your tax rate is 20%, what is the minimum interest rate that you would you need to earn on a tax-free municipal bond in order to buy it instead?

Default risk arises from the fact that

The expectations theory

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Stock Market, Information, and Financial Market Efficiency

Derivatives and Derivative Markets

The Market for Foreign Exchange

Transactions Costs, Asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Investment Banks, Mutual Funds, Hedge Funds, and the Shadow Banking System

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I: The Aggregate Demand and Aggregate Supply Model

Monetary Theory II: The IS-MP Model

Filters

Exam 5: The Risk Structure and Term Structure of Interest Rates

The term structure is usually defined with yields on which securities?

If the three-month Treasury bill has an interest rate of 0.2%, the ten-tear Treasury bond has an interest rate of 2.75%, and a ten-year bond issued by Time Warner has an interest rate of 6%, what is the risk premium on Time Warner's bond?

During the financial crisis of 2007-2009,

A bond that is generally agreed to have higher default risk will experience all of the following EXCEPT:

Unlike the segmented markets theory, the expectations theory attributes the slope of the yield curve to

In late 2012, President Obama proposed raising the top income tax rate. All of the following are likely impacts of higher income tax rates on bonds EXCEPT:

Which of the following statements about junk bonds is false?

U)S. Treasury securities

The term structure of interest rates

The key assumption of the liquidity premium theory is that investors

Under the liquidity premium theory, a flat yield curve indicates that investors expect future short-term rates to

Situations of negative interest rates on short-term bonds resulted from:

Which of the following statements about junk (high-risk)bonds is true?

The risk structure of interest rates refers to

Investors often pay professional analysts to gather and monitor information on the creditworthiness of borrowers because

The default risk premium fluctuates mainly

Currently, a three-year Treasury note pays 4.75%. Assuming that your tax rate is 20%, what is the minimum interest rate that you would you need to earn on a tax-free municipal bond in order to buy it instead?

Default risk arises from the fact that

The expectations theory

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Stock Market, Information, and Financial Market Efficiency

Derivatives and Derivative Markets

The Market for Foreign Exchange

Transactions Costs, Asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Investment Banks, Mutual Funds, Hedge Funds, and the Shadow Banking System

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I: The Aggregate Demand and Aggregate Supply Model

Monetary Theory II: The IS-MP Model

Filters