Question 1

Following the downgrade of U.S. debt by Standard & Poor's in August, 2011:

Accepted Answer

A) other rating agencies also downgraded U.S. debt 
B) interest rates spiked as investor's perception of risk increased 
C) investors didn't seem to be any more concerned about default risk than before the downgrade 
D) the U.S. implemented a plan to significantly reduce its budget deficit later that year 
A) other rating agencies also downgraded U.S. debt 
B) interest rates spiked as investor's perception of risk increased 
C) investors didn't seem to be any more concerned about default risk than before the downgrade 
D) the U.S. implemented a plan to significantly reduce its budget deficit later that year

Question 2

According to the liquidity premium theory, the yield curve normally has a positive slope because

Accepted Answer

A) short-term interest rates are expected to rise. 
B) term premiums rise as the time to maturity increases. 
C) risk premiums rise over time. 
D) long-term bonds are more liquid than short-term bonds. 
A) short-term interest rates are expected to rise. 
B) term premiums rise as the time to maturity increases. 
C) risk premiums rise over time. 
D) long-term bonds are more liquid than short-term bonds.

Question 3

Under the expectations theory, an upward-sloping yield curve indicates that investors expect future short-term rates to

Accepted Answer

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

Question 4

The default risk premium is

Accepted Answer

A) relevant only for securities issued by very small companies. 
B) the additional yield a saver requires for holding a bond with some default risk. 
C) zero for corporate bonds, but quite substantial for corporate stock. 
D) constant across the business cycle. 
A) relevant only for securities issued by very small companies. 
B) the additional yield a saver requires for holding a bond with some default risk. 
C) zero for corporate bonds, but quite substantial for corporate stock. 
D) constant across the business cycle.

Question 5

Currently, a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%. What is the risk premium of the typical A-rated ten-year corporate bond with a yield of 5.5%?

Accepted Answer

A) 0)5% 
B) 0)8% 
C) 5)5% 
D) 1)17% 
A) 0)5% 
B) 0)8% 
C) 5)5% 
D) 1)17%

Question 6

Bond ratings

Accepted Answer

A) are published annually by the federal government and are based largely on information contained in corporate tax returns. 
B) are published annually by the federal government and are based on publicly available information. 
C) are published monthly by the federal government and are based on publicly available information. 
D) are published by private bond-rating agencies. 
A) are published annually by the federal government and are based largely on information contained in corporate tax returns. 
B) are published annually by the federal government and are based on publicly available information. 
C) are published monthly by the federal government and are based on publicly available information. 
D) are published by private bond-rating agencies.

Question 7

Which of the following is NOT true of the term premium?

Accepted Answer

A) It is zero under the expectations theory. 
B) It is infinite under the segmented markets theory. 
C) It increases as a bond's maturity increases. 
D) It is zero for thirty-year bonds. 
A) It is zero under the expectations theory. 
B) It is infinite under the segmented markets theory. 
C) It increases as a bond's maturity increases. 
D) It is zero for thirty-year bonds.

Question 8

Which theory explains all three facts about the term structure?

Accepted Answer

A) expectations 
B) segmented markets 
C) preferential treatment 
D) liquidity premium 
A) expectations 
B) segmented markets 
C) preferential treatment 
D) liquidity premium

Question 9

How does the liquidity premium theory explain an upward sloping yield curve during normal economic times?

Accepted Answer

During normal economic times, future sho

Question 10

Which of the following is considered a default-risk-free instrument?

Accepted Answer

A) a three-month commercial paper issued by GE 
B) a share of stock issued by Google 
C) a three-month Treasury bill 
D) a ten-year bond issued by Intel 
A) a three-month commercial paper issued by GE 
B) a share of stock issued by Google 
C) a three-month Treasury bill 
D) a ten-year bond issued by Intel

Question 11

Which of the following is the lowest rating given to an investment-grade bond by Moody's?

Accepted Answer

A) Aa 
B) A 
C) Baa 
D) B 
A) Aa 
B) A 
C) Baa 
D) B

Question 12

Which of the following is the highest bond rating assigned by Moody's Investors Service?

Accepted Answer

A) Aaa 
B) A 
C) B 
D) Baa 
A) Aaa 
B) A 
C) B 
D) Baa

Question 13

How do ratings agencies earn income?

Accepted Answer

They primarily earn

Question 14

The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that

Accepted Answer

A) yield curves usually slope upward. 
B) yield curves usually slope downward. 
C) instruments with different maturities are perfect substitutes. 
D) savers are usually risk averse. 
A) yield curves usually slope upward. 
B) yield curves usually slope downward. 
C) instruments with different maturities are perfect substitutes. 
D) savers are usually risk averse.

Question 15

Which of the following is NOT a reason that credit ratings agencies became more relevant beginning in the late 1970s?

Accepted Answer

A) the number of bond defaults rose due to periods of recession and inflation 
B) rating agencies began to charge investors for their services 
C) governments began to include bond ratings in their regulation of banks, mutual funds, and other financial firms 
D) rating agencies began to rate bonds issued by foreign governments and firms 
A) the number of bond defaults rose due to periods of recession and inflation 
B) rating agencies began to charge investors for their services 
C) governments began to include bond ratings in their regulation of banks, mutual funds, and other financial firms 
D) rating agencies began to rate bonds issued by foreign governments and firms

Question 16

If the expectations theory of the term structure is correct, would a reduction in the supply of thirty-year Treasury bonds affect their yields?

Accepted Answer

No. According to the expectations theory

Question 17

Which of the following statements is true?

Accepted Answer

A) The more liquid the bond, the lower the yield. 
B) Tax-free bonds normally have a higher interest rate than other types of bonds. 
C) The price of a bond increases as it becomes more risky. 
D) The yield curve illustrates the relative default risks of alternative types of bonds. 
A) The more liquid the bond, the lower the yield. 
B) Tax-free bonds normally have a higher interest rate than other types of bonds. 
C) The price of a bond increases as it becomes more risky. 
D) The yield curve illustrates the relative default risks of alternative types of bonds.

Question 18

Suppose that savers become less willing to purchase medium-quality corporate bonds. The result will be that the prices of medium-quality corporate bonds will

Accepted Answer

A) fall relative to the price of U.S. Treasury securities, but rise relative to the price of high-quality corporate bonds. 
B) rise relative to the price of U.S. Treasury securities, but fall relative to the price of high-quality corporate bonds. 
C) rise relative to the prices of U.S. Treasury securities and high-quality corporate bonds. 
D) fall relative to the prices of U.S. Treasury securities and high-quality corporate bonds. 
A) fall relative to the price of U.S. Treasury securities, but rise relative to the price of high-quality corporate bonds. 
B) rise relative to the price of U.S. Treasury securities, but fall relative to the price of high-quality corporate bonds. 
C) rise relative to the prices of U.S. Treasury securities and high-quality corporate bonds. 
D) fall relative to the prices of U.S. Treasury securities and high-quality corporate bonds.

Question 19

Some claim that ratings agencies have a conflict of interest since:

Accepted Answer

A) they rate the quality of their own bonds 
B) since agencies charge firms for their services rather than investors, they have an incentive to give high ratings to gain business 
C) government began to include bond ratings as part of regulations of mutual funds, banks, and financial firms 
D) they issued many of the mortgages that were later securitized into bonds 
A) they rate the quality of their own bonds 
B) since agencies charge firms for their services rather than investors, they have an incentive to give high ratings to gain business 
C) government began to include bond ratings as part of regulations of mutual funds, banks, and financial firms 
D) they issued many of the mortgages that were later securitized into bonds

Question 20

Bonds receiving one of the top four ratings are considered:

Accepted Answer

A) junk 
B) speculative 
C) AAA 
D) investment grade 
A) junk 
B) speculative 
C) AAA 
D) investment grade

Following the downgrade of U.S. debt by Standard & Poor's in August, 2011:

According to the liquidity premium theory, the yield curve normally has a positive slope because

Under the expectations theory, an upward-sloping yield curve indicates that investors expect future short-term rates to

The default risk premium is

Currently, a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%. What is the risk premium of the typical A-rated ten-year corporate bond with a yield of 5.5%?

Bond ratings

Which of the following is NOT true of the term premium?

Which theory explains all three facts about the term structure?

How does the liquidity premium theory explain an upward sloping yield curve during normal economic times?

Which of the following is considered a default-risk-free instrument?

Which of the following is the lowest rating given to an investment-grade bond by Moody's?

Which of the following is the highest bond rating assigned by Moody's Investors Service?

How do ratings agencies earn income?

The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that

Which of the following is NOT a reason that credit ratings agencies became more relevant beginning in the late 1970s?

If the expectations theory of the term structure is correct, would a reduction in the supply of thirty-year Treasury bonds affect their yields?

Which of the following statements is true?

Suppose that savers become less willing to purchase medium-quality corporate bonds. The result will be that the prices of medium-quality corporate bonds will

Some claim that ratings agencies have a conflict of interest since:

Bonds receiving one of the top four ratings are considered:

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

Following the downgrade of U.S. debt by Standard & Poor's in August, 2011:

According to the liquidity premium theory, the yield curve normally has a positive slope because

Under the expectations theory, an upward-sloping yield curve indicates that investors expect future short-term rates to

The default risk premium is

Currently, a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%. What is the risk premium of the typical A-rated ten-year corporate bond with a yield of 5.5%?

Bond ratings

Which of the following is NOT true of the term premium?

Which theory explains all three facts about the term structure?

How does the liquidity premium theory explain an upward sloping yield curve during normal economic times?

Which of the following is considered a default-risk-free instrument?

Which of the following is the lowest rating given to an investment-grade bond by Moody's?

Which of the following is the highest bond rating assigned by Moody's Investors Service?

How do ratings agencies earn income?

The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that

Which of the following is NOT a reason that credit ratings agencies became more relevant beginning in the late 1970s?

If the expectations theory of the term structure is correct, would a reduction in the supply of thirty-year Treasury bonds affect their yields?

Which of the following statements is true?

Suppose that savers become less willing to purchase medium-quality corporate bonds. The result will be that the prices of medium-quality corporate bonds will

Some claim that ratings agencies have a conflict of interest since:

Bonds receiving one of the top four ratings are considered:

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