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

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

Of the four theories that explain how interest rates on bonds with different terms to maturity are related, the one that assumes that bonds of different maturities are not substitutes for one another is the

Which of the following statements are true?

(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.

A positive liquidity premium indicates that investors prefer long-term bonds over short-term bonds.

A bond rating of Aa or AA would mean that the quality of the bond is

According to the expectations theory, the interest rate on a long-term bond is the average of the short-term interest rates expected over the life of the long-term bond.

According to the expectations theory of the term structure,

(I)The risk premium widens as the default risk on corporate bonds increases. (II)The risk premium widens as corporate bonds become less liquid.

The expectations theory is able to explain why yield curves are usually upward-sloping.

According to the expectations theory of the term structure,

When yield curves are downward-sloping, long-term interest rates are above short-term interest rates.

(I)If a corporate bond becomes less liquid, the interest rate on the bond will fall. (II)If a corporate bond becomes less liquid, the interest rate on Treasury bonds will fall.

If municipal bonds were to lose their tax-free status, then the demand for Treasury bonds would shift ________, and the interest rate on Treasury bonds would ________.

According to the market segmentation theory of the term structure,

Yield curves can be classified as

The risk premium on corporate bonds becomes smaller if

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

Typically, yield curves are

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