Question 1

Following the subprime collapse,the spread (difference)between the interest rates on Baa bonds and Treasury bonds widened.

Accepted Answer

A) True 
 B)False

Question 2

According to the market segmentation theory of the term structure,

Accepted Answer

A)  the interest rate for bonds of one maturity is determined by the supply and demand for bonds of that maturity. 
B)  bonds of one maturity are not substitutes for bonds of other maturities; therefore, interest rates on bonds of different maturities do not move together over time. 
C)  investors' strong preference for short-term relative to long-term bonds explains why yield curves typically slope upward. 
D)  all of the above. 
E)  none of the above. 
A)  the interest rate for bonds of one maturity is determined by the supply and demand for bonds of that maturity. 
B)  bonds of one maturity are not substitutes for bonds of other maturities; therefore, interest rates on bonds of different maturities do not move together over time. 
C)  investors' strong preference for short-term relative to long-term bonds explains why yield curves typically slope upward. 
D)  all of the above. 
E)  none of the above.

Question 3

Explain why the liquidity premium theory is so widely accepted.

Accepted Answer

The liquidity premium theory is widely a

Question 4

Based on the expectations hypothesis,the steep upward sloping yield curve in June of 2013 indicted that short-term rates would ________ in the future.

Accepted Answer

A)  climb 
B)  fall 
C)  remain the same 
D)  change in a random fashion 
A)  climb 
B)  fall 
C)  remain the same 
D)  change in a random fashion

Question 5

What effect did the Bush Tax Cut have on bond interest rates?

Accepted Answer

The effect of Bush Tax Cut have on bond

Question 6

(I)If a corporate bond becomes less liquid,the demand for the bond will fall,causing the interest rate to rise.
(II)If a corporate bond becomes less liquid,the demand for Treasury bonds does not change.

Accepted Answer

A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false. 
A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false.

Question 7

When a municipal bond is given tax-free status,the demand for Treasury bonds shifts ________,and the interest rate on Treasury bonds ________.

Accepted Answer

A)  leftward; rises 
B)  leftward; falls 
C)  rightward; rises 
D)  rightward; falls 
A)  leftward; rises 
B)  leftward; falls 
C)  rightward; rises 
D)  rightward; falls

Question 8

The risk premium on corporate bonds becomes smaller if

Accepted Answer

A)  the riskiness of corporate bonds increases. 
B)  the liquidity of corporate bonds increases. 
C)  the liquidity of corporate bonds decreases. 
D)  the riskiness of corporate bonds decreases. 
E)  either B or D of the above occur. 
A)  the riskiness of corporate bonds increases. 
B)  the liquidity of corporate bonds increases. 
C)  the liquidity of corporate bonds decreases. 
D)  the riskiness of corporate bonds decreases. 
E)  either B or D of the above occur.

Question 9

How would a severe recession affect the risk premium on corporate bonds?

Accepted Answer

severe recession will always impact the

Question 10

A corporation suffering big losses might be more likely to suspend interest payments on its bonds,thereby

Accepted Answer

A)  raising the default risk and causing the demand for its bonds to rise. 
B)  raising the default risk and causing the demand for its bonds to fall. 
C)  lowering the default risk and causing the demand for its bonds to rise. 
D)  lowering the default risk and causing the demand for its bonds to fall. 
A)  raising the default risk and causing the demand for its bonds to rise. 
B)  raising the default risk and causing the demand for its bonds to fall. 
C)  lowering the default risk and causing the demand for its bonds to rise. 
D)  lowering the default risk and causing the demand for its bonds to fall.

Question 11

When the default risk on corporate bonds decreases,other things equal,the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.

Accepted Answer

A)  right; right 
B)  right; left 
C)  left; left 
D)  left; right 
A)  right; right 
B)  right; left 
C)  left; left 
D)  left; right

Question 12

Of the four theories that explain how interest rates on bonds with different terms to maturity are related,the one that views long-term interest rates as equaling the average of future short-term rates expected to occur over the life of the bond is the

Accepted Answer

A)  pure expectations theory. 
B)  preferred habitat theory. 
C)  liquidity premium theory. 
D)  segmented markets theory. 
A)  pure expectations theory. 
B)  preferred habitat theory. 
C)  liquidity premium theory. 
D)  segmented markets theory.

Question 13

Which of the following long-term bonds should have 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 14

If the expected path of one-year interest rates over the next five years is 2 percent,4 percent,1 percent,4 percent,and 3 percent,then the pure 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

Moody's and Standard and Poor's are agencies that

Accepted Answer

A)  help investors collect when corporations default on their bonds. 
B)  advise municipal bond issuers on the tax exempt status of their bonds. 
C)  produce information about the probability of default on corporate bonds. 
D)  maintain liquid markets for corporate bonds. 
A)  help investors collect when corporations default on their bonds. 
B)  advise municipal bond issuers on the tax exempt status of their bonds. 
C)  produce information about the probability of default on corporate bonds. 
D)  maintain liquid markets for corporate bonds.

Question 16

In actual practice,short-term interest rates are just as likely to fall as to rise; this is the major shortcoming of the

Accepted Answer

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

Question 17

Which of the following statements are true?

Accepted Answer

A)  Because coupon payments on municipal bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in higher income tax brackets. 
B)  An increase in tax rates will increase the demand for municipal bonds, lowering their interest rates. 
C)  Interest rates on municipal bonds will be lower than on comparable bonds without the tax exemption. 
D)  All of the above are true statements. 
E)  Only A and B are true statements. 
A)  Because coupon payments on municipal bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in higher income tax brackets. 
B)  An increase in tax rates will increase the demand for municipal bonds, lowering their interest rates. 
C)  Interest rates on municipal bonds will be lower than on comparable bonds without the tax exemption. 
D)  All of the above are true statements. 
E)  Only A and B are true statements.

Question 18

Which of the following long-term bonds should have the lowest 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 19

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 20

The market segmentation theory is able to explain why interest rates on bonds of different maturities move together over time.

Accepted Answer

A) True 
 B)False

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

Following the subprime collapse,the spread (difference)between the interest rates on Baa bonds and Treasury bonds widened.

According to the market segmentation theory of the term structure,

Explain why the liquidity premium theory is so widely accepted.

Based on the expectations hypothesis,the steep upward sloping yield curve in June of 2013 indicted that short-term rates would ________ in the future.

What effect did the Bush Tax Cut have on bond interest rates?

(I)If a corporate bond becomes less liquid,the demand for the bond will fall,causing the interest rate to rise. (II)If a corporate bond becomes less liquid,the demand for Treasury bonds does not change.

When a municipal bond is given tax-free status,the demand for Treasury bonds shifts ________,and the interest rate on Treasury bonds ________.

The risk premium on corporate bonds becomes smaller if

How would a severe recession affect the risk premium on corporate bonds?

A corporation suffering big losses might be more likely to suspend interest payments on its bonds,thereby

When the default risk on corporate bonds decreases,other things equal,the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.

Of the four theories that explain how interest rates on bonds with different terms to maturity are related,the one that views long-term interest rates as equaling the average of future short-term rates expected to occur over the life of the bond is the

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

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

Moody's and Standard and Poor's are agencies that

In actual practice,short-term interest rates are just as likely to fall as to rise; this is the major shortcoming of the

Which of the following statements are true?

Which of the following long-term bonds should have the lowest interest rate?

Economists' attempts to explain the term structure of interest rates

The market segmentation theory is able to explain why interest rates on bonds of different maturities move together over time.

Why Study Financial Markets and Institutions?

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation?

Why Do Interest Rates Change?

Are Financial Markets Efficient?

Why Do Financial Institutions Exist?

Why Do Financial Crises Occur and

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging with Financial Derivatives

Financial Crises In Emerging Market Economies

Savings Associations and Credit Unions

Finance Companies

Filters

When a municipal bond is given tax-free status,the demand for Treasury bonds shifts ,and the interest rate on Treasury bonds .

When the default risk on corporate bonds decreases,other things equal,the demand curve for corporate bonds shifts to the and the demand curve for Treasury bonds shifts to the .