Question 1

Use the following figure to answer the questions : 
 
-The steeply upward sloping yield curve in the figure above indicates that

Accepted Answer

A) short-term interest rates are expected to rise in the future. 
B) short-term interest rates are expected to fall moderately in the future. 
C) short-term interest rates are expected to fall sharply in the future. 
D) short-term interest rates are expected to remain unchanged in the future. 
A) short-term interest rates are expected to rise in the future. 
B) short-term interest rates are expected to fall moderately in the future. 
C) short-term interest rates are expected to fall sharply in the future. 
D) short-term interest rates are expected to remain unchanged in the future. A

Question 2

If a corporation begins to suffer large losses,then the default risk on the corporate bond will

Accepted Answer

A) increase and the bond's return will become more uncertain,meaning the expected return on the corporate bond will fall. 
B) increase and the bond's return will become less uncertain,meaning the expected return on the corporate bond will fall. 
C) decrease and the bond's return will become less uncertain,meaning the expected return on the corporate bond will fall. 
D) decrease and the bond's return will become less uncertain,meaning the expected return on the corporate bond will rise. 
A) increase and the bond's return will become more uncertain,meaning the expected return on the corporate bond will fall. 
B) increase and the bond's return will become less uncertain,meaning the expected return on the corporate bond will fall. 
C) decrease and the bond's return will become less uncertain,meaning the expected return on the corporate bond will fall. 
D) decrease and the bond's return will become less uncertain,meaning the expected return on the corporate bond will rise. A

Question 3

A plot of the interest rates on default-free government bonds with different terms to maturity is called

Accepted Answer

A) a risk-structure curve. 
B) a default-free curve. 
C) a yield curve. 
D) an interest-rate curve. 
A) a risk-structure curve. 
B) a default-free curve. 
C) a yield curve. 
D) an interest-rate curve. C

Question 4

Which of the following long-term bonds has the highest interest rate?

Accepted Answer

A) Corporate Baa bonds 
B) U.S.Treasury bonds 
C) Corporate Aaa bonds 
D) Municipal bonds 
A) Corporate Baa bonds 
B) U.S.Treasury bonds 
C) Corporate Aaa bonds 
D) Municipal bonds

Question 5

If the expected path of one-year interest rates over the next five years is 4 percent,5 percent,7 percent,8 percent,and 6 percent,then the expectations theory predicts that today's interest rate on the five-year bond is

Accepted Answer

A) 4 percent. 
B) 5 percent. 
C) 6 percent. 
D) 7 percent. 
A) 4 percent. 
B) 5 percent. 
C) 6 percent. 
D) 7 percent.

Question 6

The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S.Treasury bonds.This is due to

Accepted Answer

A) a reduction in risk. 
B) a reduction in maturity. 
C) a flight to quality. 
D) a flight to liquidity. 
A) a reduction in risk. 
B) a reduction in maturity. 
C) a flight to quality. 
D) a flight to liquidity.

Question 7

Everything else held constant,an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds,and ________ the demand for U.S.government bonds.

Accepted Answer

A) increasing; increasing 
B) increasing; decreasing 
C) decreasing; increasing 
D) decreasing; decreasing 
A) increasing; increasing 
B) increasing; decreasing 
C) decreasing; increasing 
D) decreasing; decreasing

Question 8

The risk that interest payments will not be made,or that the face value of a bond is not repaid when a bond matures is

Accepted Answer

A) interest rate risk. 
B) inflation risk. 
C) moral hazard. 
D) default risk. 
A) interest rate risk. 
B) inflation risk. 
C) moral hazard. 
D) default risk.

Question 9

An inverted yield curve predicts that short-term interest rates

Accepted Answer

A) are expected to rise in the future. 
B) will rise and then fall in the future. 
C) will remain unchanged in the future. 
D) will fall in the future. 
A) are expected to rise in the future. 
B) will rise and then fall in the future. 
C) will remain unchanged in the future. 
D) will fall in the future.

Question 10

When yield curves are steeply upward sloping,

Accepted Answer

A) long-term interest rates are above short-term interest rates. 
B) short-term interest rates are above long-term interest rates. 
C) short-term interest rates are about the same as long-term interest rates. 
D) medium-term interest rates are above both short-term and long-term interest rates. 
A) long-term interest rates are above short-term interest rates. 
B) short-term interest rates are above long-term interest rates. 
C) short-term interest rates are about the same as long-term interest rates. 
D) medium-term interest rates are above both short-term and long-term interest rates.

Question 11

According to the liquidity premium theory of the term structure

Accepted Answer

A) because buyers of bonds may prefer bonds of one maturity over another,interest rates on bonds of different maturities do not move together over time. 
B) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. 
C) because of the positive term premium,the yield curve will not be observed to be downward sloping. 
D) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. 
A) because buyers of bonds may prefer bonds of one maturity over another,interest rates on bonds of different maturities do not move together over time. 
B) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. 
C) because of the positive term premium,the yield curve will not be observed to be downward sloping. 
D) the interest rate for each maturity bond is determined by supply and demand for that maturity bond.

Question 12

Three factors explain the risk structure of interest rates:

Accepted Answer

A) liquidity,default risk,and the income tax treatment of a security. 
B) maturity,default risk,and the income tax treatment of a security. 
C) maturity,liquidity,and the income tax treatment of a security. 
D) maturity,default risk,and the liquidity of a security. 
A) liquidity,default risk,and the income tax treatment of a security. 
B) maturity,default risk,and the income tax treatment of a security. 
C) maturity,liquidity,and the income tax treatment of a security. 
D) maturity,default risk,and the liquidity of a security.

Question 13

If bonds with different maturities are perfect substitutes,then the ________ on these bonds must be equal.

Accepted Answer

A) expected return 
B) surprise return 
C) surplus return 
D) excess return 
A) expected return 
B) surprise return 
C) surplus return 
D) excess return

Question 14

If the expected path of 1-year interest rates over the next five years is 2 percent,4 percent,1 percent,4 percent,and 3 percent,the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of

Accepted Answer

A) one year. 
B) two years. 
C) three years. 
D) four years. 
A) one year. 
B) two years. 
C) three years. 
D) four years.

Question 15

A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium.

Accepted Answer

A) positive; raise 
B) positive; lower 
C) negative; raise 
D) negative; lower 
A) positive; raise 
B) positive; lower 
C) negative; raise 
D) negative; lower

Question 16

Which of the following securities has the lowest interest rate?

Accepted Answer

A) Junk bonds 
B) U.S.Treasury bonds 
C) Investment-grade bonds 
D) Corporate Baa bonds 
A) Junk bonds 
B) U.S.Treasury bonds 
C) Investment-grade bonds 
D) Corporate Baa bonds

Question 17

According to the expectations theory of the term structure,the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond.

Accepted Answer

A) average 
B) sum 
C) difference 
D) multiple 
A) average 
B) sum 
C) difference 
D) multiple

Question 18

According to the segmented markets theory of the term structure

Accepted Answer

A) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds. 
B) buyers of bonds do not prefer bonds of one maturity over another. 
C) interest rates on bonds of different maturities do not move together over time. 
D) buyers require an additional incentive to hold long-term bonds. 
A) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds. 
B) buyers of bonds do not prefer bonds of one maturity over another. 
C) interest rates on bonds of different maturities do not move together over time. 
D) buyers require an additional incentive to hold long-term bonds.

Question 19

According to the liquidity premium theory of the term structure,a flat yield curve indicates that short-term interest rates are expected to

Accepted Answer

A) rise in the future. 
B) remain unchanged in the future. 
C) decline moderately in the future. 
D) decline sharply in the future. 
A) rise in the future. 
B) remain unchanged in the future. 
C) decline moderately in the future. 
D) decline sharply in the future.

Question 20

An increase in default risk on corporate bonds ________ the demand for these bonds,but ________ the demand for default-free bonds,everything else held constant.

Accepted Answer

A) increases; lowers 
B) lowers; increases 
C) does not change; greatly increases 
D) moderately lowers; does not change 
A) increases; lowers 
B) lowers; increases 
C) does not change; greatly increases 
D) moderately lowers; does not change

Exam 6: The Risk and Term Structure of Interest Rates

Use the following figure to answer the questions : -The steeply upward sloping yield curve in the figure above indicates that

If a corporation begins to suffer large losses,then the default risk on the corporate bond will

A plot of the interest rates on default-free government bonds with different terms to maturity is called

Which of the following long-term bonds has the highest interest rate?

If the expected path of one-year interest rates over the next five years is 4 percent,5 percent,7 percent,8 percent,and 6 percent,then the expectations theory predicts that today's interest rate on the five-year bond is

The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S.Treasury bonds.This is due to

Everything else held constant,an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds,and ________ the demand for U.S.government bonds.

The risk that interest payments will not be made,or that the face value of a bond is not repaid when a bond matures is

An inverted yield curve predicts that short-term interest rates

When yield curves are steeply upward sloping,

According to the liquidity premium theory of the term structure

Three factors explain the risk structure of interest rates:

If bonds with different maturities are perfect substitutes,then the ________ on these bonds must be equal.

If the expected path of 1-year interest rates over the next five years is 2 percent,4 percent,1 percent,4 percent,and 3 percent,the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of

A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium.

Which of the following securities has the lowest interest rate?

According to the expectations theory of the term structure,the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond.

According to the segmented markets theory of the term structure

According to the liquidity premium theory of the term structure,a flat yield curve indicates that short-term interest rates are expected to

An increase in default risk on corporate bonds ________ the demand for these bonds,but ________ the demand for default-free bonds,everything else held constant.

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behavior of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises and the Subprime Meltdown

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Central Banks and the Federal Reserve System

The Money Supply Process

Tools for Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

The Demand for Money

The Islm Model

Monetary and Fiscal Policy in the ISLM Model

Aggregate Demand and Supply Analysis

Transmission Mechanisms of Monetary Policy: The Evidence

Money and Inflation

Rational Expectations: Implications for Policy

Filters

Everything else held constant,an increase in marginal tax rates would likely have the effect of the demand for municipal bonds,and the demand for U.S.government bonds.

A bond with default risk will always have a risk premium and an increase in its default risk will the risk premium.

An increase in default risk on corporate bonds the demand for these bonds,but the demand for default-free bonds,everything else held constant.