Exam 5: How Do Risk and Term Structure Affect Interest Rates?

The relationship among interest rates on bonds with identical default risk but different maturities is called the

If the yield curve has a mild upward slope,the liquidity premium theory indicates that the market is predicting

If Moody's or Standard and Poor's downgrades its rating on a corporate bond,the demand for the bond ________ and its yield ________.

When the corporate bond market becomes more liquid,other things equal,the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.

If the yield curve slope is flat,the liquidity premium theory indicates that the market is predicting

The liquidity premium theory of the term structure

If income tax rates rise,then

Since yield curves are usually upward sloping,the ________ indicates that,on average,people tend to prefer holding short-term bonds to long-term bonds.

A mildly upward-sloping yield curve suggests that the market is predicting constant short-term interest rates.

If a bond has a favorable tax treatment,its required interest rate (all else equal)

Closely related to the ________ is the preferred habitat theory,which takes a somewhat less direct approach to modifying the expectations hypothesis but comes to a similar conclusion.

What do credit-rating agencies do and why is this work important?

With the Obama tax increase that repealed the Bush tax cuts for high-income tax payers in 2013,the after-tax expected return on tax-free municipal bonds relative to Treasury bonds decreases.

Bonds with relatively high risk of default are called

When yield curves are steeply upward-sloping,

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

According to the expectations theory of the term structure,

Bonds with the lowest risk of default are often referred to as junk bonds.

An increase in income tax rates will cause the interest rates on tax-exempt municipal bonds to fall relative to the interest rate on taxable corporate securities.

(I)An increase in default risk on corporate bonds shifts the demand curve for corporate bonds to the left. (II)An increase in default risk on corporate bonds shifts the demand curve for Treasury bonds to the right.