Question 1

According to the expectations theory of the term structure

Accepted Answer

A) when the yield curve is steeply upward sloping,short-term interest rates are expected to remain relatively stable in the future. 
B) when the yield curve is downward sloping,short-term interest rates are expected to remain relatively stable in the future. 
C) investors have strong preferences for short-term relative to long-term bonds,explaining why yield curves typically slope upward. 
D) yield curves should be equally likely to slope downward as slope upward. 
A) when the yield curve is steeply upward sloping,short-term interest rates are expected to remain relatively stable in the future. 
B) when the yield curve is downward sloping,short-term interest rates are expected to remain relatively stable in the future. 
C) investors have strong preferences for short-term relative to long-term bonds,explaining why yield curves typically slope upward. 
D) yield curves should be equally likely to slope downward as slope upward.

Question 2

Economists' attempts to explain the term structure of interest rates

Accepted Answer

A) illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence. 
B) illustrate how economists continue to accept theories that fail to explain observed behavior of interest rate movements. 
C) prove that the real world is a special case that tends to get short shrift in theoretical models. 
D) have proved entirely unsatisfactory to date. 
A) illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence. 
B) illustrate how economists continue to accept theories that fail to explain observed behavior of interest rate movements. 
C) prove that the real world is a special case that tends to get short shrift in theoretical models. 
D) have proved entirely unsatisfactory to date.

Question 3

When yield curves are downward 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 4

During a "flight to quality"

Accepted Answer

A) the spread between Treasury bonds and Baa bonds increases. 
B) the spread between Treasury bonds and Baa bonds decreases. 
C) the spread between Treasury bonds and Baa bonds is not affected. 
D) the change in the spread between Treasury bonds and Baa bonds cannot be predicted. 
A) the spread between Treasury bonds and Baa bonds increases. 
B) the spread between Treasury bonds and Baa bonds decreases. 
C) the spread between Treasury bonds and Baa bonds is not affected. 
D) the change in the spread between Treasury bonds and Baa bonds cannot be predicted.

Question 5

Which of the following statements are true?

Accepted Answer

A) A liquid asset is one that can be quickly and cheaply converted into cash. 
B) The demand for a bond declines when it becomes less liquid,decreasing the interest rate spread between it and relatively more liquid bonds. 
C) The differences in bond interest rates reflect differences in default risk only. 
D) The corporate bond market is the most liquid bond market. 
A) A liquid asset is one that can be quickly and cheaply converted into cash. 
B) The demand for a bond declines when it becomes less liquid,decreasing the interest rate spread between it and relatively more liquid bonds. 
C) The differences in bond interest rates reflect differences in default risk only. 
D) The corporate bond market is the most liquid bond market.

Question 6

A key assumption in the segmented markets theory is that bonds of different maturities

Accepted Answer

A) are not substitutes at all. 
B) are perfect substitutes. 
C) are substitutes only if the investor is given a premium incentive. 
D) are substitutes but not perfect substitutes. 
A) are not substitutes at all. 
B) are perfect substitutes. 
C) are substitutes only if the investor is given a premium incentive. 
D) are substitutes but not perfect substitutes.

Question 7

Use the following figure to answer the questions : 
 
-The mound-shaped yield curve in the figure above indicates that short-term interest rates are expected to

Accepted Answer

A) rise in the near-term and fall later on. 
B) fall moderately in the near-term and rise later on. 
C) fall sharply in the near-term and rise later on. 
D) remain unchanged in the near-term and fall later on. 
A) rise in the near-term and fall later on. 
B) fall moderately in the near-term and rise later on. 
C) fall sharply in the near-term and rise later on. 
D) remain unchanged in the near-term and fall later on.

Question 8

Over the next three years,the expected path of 1-year interest rates is 4,1,and 1 percent.The expectations theory of the term structure predicts that the current interest rate on 3-year bond is

Accepted Answer

A) 1 percent. 
B) 2 percent. 
C) 3 percent. 
D) 4 percent. 
A) 1 percent. 
B) 2 percent. 
C) 3 percent. 
D) 4 percent.

Question 9

According to the liquidity premium theory,a yield curve that is flat means that

Accepted Answer

A) bond purchasers expect interest rates to rise in the future. 
B) bond purchasers expect interest rates to stay the same. 
C) bond purchasers expect interest rates to fall in the future. 
D) the yield curve has nothing to do with expectations of bond purchasers. 
A) bond purchasers expect interest rates to rise in the future. 
B) bond purchasers expect interest rates to stay the same. 
C) bond purchasers expect interest rates to fall in the future. 
D) the yield curve has nothing to do with expectations of bond purchasers.

Question 10

If the expected path of 1-year interest rates over the next five years is 1 percent,2 percent,3 percent,4 percent,and 5 percent,the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of

Accepted Answer

A) two years. 
B) three years. 
C) four years. 
D) five years. 
A) two years. 
B) three years. 
C) four years. 
D) five years.

Question 11

According to the liquidity premium theory of the term structure

Accepted Answer

A) bonds of different maturities are not substitutes. 
B) if yield curves are downward sloping,then short-term interest rates are expected to fall by so much that,even when the positive term premium is added,long-term rates fall below short-term rates. 
C) yield curves should never slope downward. 
D) interest rates on bonds of different maturities do not move together over time. 
A) bonds of different maturities are not substitutes. 
B) if yield curves are downward sloping,then short-term interest rates are expected to fall by so much that,even when the positive term premium is added,long-term rates fall below short-term rates. 
C) yield curves should never slope downward. 
D) interest rates on bonds of different maturities do not move together over time.

Question 12

In actual practice,short-term interest rates and long-term interest rates usually move together; this is the major shortcoming of the

Accepted Answer

A) segmented markets theory. 
B) expectations theory. 
C) liquidity premium theory. 
D) separable markets theory. 
A) segmented markets theory. 
B) expectations theory. 
C) liquidity premium theory. 
D) separable markets theory.

Question 13

As their relative riskiness ________,the expected return on corporate bonds ________ relative to the expected return on default-free bonds,everything else held constant.

Accepted Answer

A) increases; increases 
B) increases; decreases 
C) decreases; decreases 
D) decreases; does not change 
A) increases; increases 
B) increases; decreases 
C) decreases; decreases 
D) decreases; does not change

Question 14

When short-term interest rates are expected to fall sharply in the future,the yield curve will

Accepted Answer

A) slope up. 
B) be flat. 
C) be inverted. 
D) be an inverted U shape. 
A) slope up. 
B) be flat. 
C) be inverted. 
D) be an inverted U shape.

Question 15

Typically,yield curves are

Accepted Answer

A) gently upward sloping. 
B) mound shaped. 
C) flat. 
D) bowl shaped. 
A) gently upward sloping. 
B) mound shaped. 
C) flat. 
D) bowl shaped.

Question 16

Everything else held constant,if the tax-exempt status of municipal bonds were eliminated,then

Accepted Answer

A) the interest rates on municipal bonds would still be less than the interest rate on Treasury bonds. 
B) the interest rate on municipal bonds would equal the rate on Treasury bonds. 
C) the interest rate on municipal bonds would exceed the rate on Treasury bonds. 
D) the interest rates on municipal,Treasury,and corporate bonds would all increase. 
A) the interest rates on municipal bonds would still be less than the interest rate on Treasury bonds. 
B) the interest rate on municipal bonds would equal the rate on Treasury bonds. 
C) the interest rate on municipal bonds would exceed the rate on Treasury bonds. 
D) the interest rates on municipal,Treasury,and corporate bonds would all increase.

Question 17

According to the expectations theory of the term structure

Accepted Answer

A) the interest rate on long-term bonds will exceed the average of short-term interest rates that people expect to occur over the life of the long-term bonds,because of their preference for short-term securities. 
B) interest rates on bonds of different maturities move together over time. 
C) buyers of bonds prefer short-term to long-term bonds. 
D) buyers require an additional incentive to hold long-term bonds. 
A) the interest rate on long-term bonds will exceed the average of short-term interest rates that people expect to occur over the life of the long-term bonds,because of their preference for short-term securities. 
B) interest rates on bonds of different maturities move together over time. 
C) buyers of bonds prefer short-term to long-term bonds. 
D) buyers require an additional incentive to hold long-term bonds.

Question 18

The segmented markets theory can explain

Accepted Answer

A) why yield curves usually tend to slope upward. 
B) why interest rates on bonds of different maturities tend to move together. 
C) why yield curves tend to slope upward when short-term interest rates are low and to be inverted when short-term interest rates are high. 
D) why yield curves have been used to forecast business cycles. 
A) why yield curves usually tend to slope upward. 
B) why interest rates on bonds of different maturities tend to move together. 
C) why yield curves tend to slope upward when short-term interest rates are low and to be inverted when short-term interest rates are high. 
D) why yield curves have been used to forecast business cycles.

Question 19

Which of the following statements are true?

Accepted Answer

A) A decrease in default risk on corporate bonds lowers the demand for these bonds,but increases the demand for default-free bonds. 
B) The expected return on corporate bonds decreases as default risk increases. 
C) A corporate bond's return becomes less uncertain as default risk increases. 
D) As their relative riskiness increases,the expected return on corporate bonds increases relative to the expected return on default-free bonds. 
A) A decrease in default risk on corporate bonds lowers the demand for these bonds,but increases the demand for default-free bonds. 
B) The expected return on corporate bonds decreases as default risk increases. 
C) A corporate bond's return becomes less uncertain as default risk increases. 
D) As their relative riskiness increases,the expected return on corporate bonds increases relative to the expected return on default-free bonds.

Question 20

Corporate bonds are not as liquid as government bonds because

Accepted Answer

A) fewer corporate bonds for any one corporation are traded,making them more costly to sell. 
B) the corporate bond rating must be calculated each time they are traded. 
C) corporate bonds are not callable. 
D) corporate bonds cannot be resold. 
A) fewer corporate bonds for any one corporation are traded,making them more costly to sell. 
B) the corporate bond rating must be calculated each time they are traded. 
C) corporate bonds are not callable. 
D) corporate bonds cannot be resold.

Exam 6: The Risk and Term Structure of Interest Rates

According to the expectations theory of the term structure

Economists' attempts to explain the term structure of interest rates

When yield curves are downward sloping,

During a "flight to quality"

Which of the following statements are true?

A key assumption in the segmented markets theory is that bonds of different maturities

Use the following figure to answer the questions : -The mound-shaped yield curve in the figure above indicates that short-term interest rates are expected to

Over the next three years,the expected path of 1-year interest rates is 4,1,and 1 percent.The expectations theory of the term structure predicts that the current interest rate on 3-year bond is

According to the liquidity premium theory,a yield curve that is flat means that

If the expected path of 1-year interest rates over the next five years is 1 percent,2 percent,3 percent,4 percent,and 5 percent,the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of

According to the liquidity premium theory of the term structure

In actual practice,short-term interest rates and long-term interest rates usually move together; this is the major shortcoming of the

As their relative riskiness ________,the expected return on corporate bonds ________ relative to the expected return on default-free bonds,everything else held constant.

When short-term interest rates are expected to fall sharply in the future,the yield curve will

Typically,yield curves are

Everything else held constant,if the tax-exempt status of municipal bonds were eliminated,then

According to the expectations theory of the term structure

The segmented markets theory can explain

Which of the following statements are true?

Corporate bonds are not as liquid as government bonds because

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

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As their relative riskiness ,the expected return on corporate bonds relative to the expected return on default-free bonds,everything else held constant.