Question 1

The spread between the interest rates on bonds with default risk and default-free bonds is called the risk premium.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

The answer of How would a severe recession affect the...

Question 3

What is meant by the risk structure of interest rates?

Accepted Answer

The risk structure of interest rates ref

Question 4

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 ________.

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 5

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 6

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

Accepted Answer

The answer of What do credit-rating agencies do and why...

Question 7

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 rise in the future. 
B) when the yield curve is downward-sloping, short-term interest rates are expected to decline in the future. 
C) buyers of bonds prefer short-term to long-term bonds. 
D) all of the above. 
E) only A and B of the above. 
A) when the yield curve is steeply upward-sloping, short-term interest rates are expected to rise in the future. 
B) when the yield curve is downward-sloping, short-term interest rates are expected to decline in the future. 
C) buyers of bonds prefer short-term to long-term bonds. 
D) all of the above. 
E) only A and B of the above.

Question 8

Explain why the liquidity premium theory is so widely accepted.

Accepted Answer

The liquidity premium theory is widely a

Question 9

According to the liquidity premium theory of the term structure, a downward-sloping 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 10

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.

Accepted Answer

A) True 
 B)False

Question 11

Bonds with relatively low risk of default are called

Accepted Answer

A) zero coupon bonds. 
B) junk bonds. 
C) investment-grade bonds. 
D) none of the above. 
A) zero coupon bonds. 
B) junk bonds. 
C) investment-grade bonds. 
D) none of the above.

Question 12

Why is it unlikely that the expectations theory alone is the correct theory for explaining the yield curve?

Accepted Answer

The answer of Why is it unlikely that the expectations...

Question 13

The ________ theory is the most widely accepted theory of the term structure of interest rates because it explains the major empirical facts about the term structure so well.

Accepted Answer

A) liquidity premium 
B) market segmentation 
C) expectations 
D) none of the above 
A) liquidity premium 
B) market segmentation 
C) expectations 
D) none of the above

Question 14

Corporate bonds are not as liquid as government bonds because

Accepted Answer

A) fewer 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) all of the above. 
E) only A and B of the above. 
A) fewer 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) all of the above. 
E) only A and B of the above.

Question 15

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 16

Why would an increase in the income tax rate reduce borrowing costs to municipalities?

Accepted Answer

The answer of Why would an increase in the income...

Question 17

The liquidity premium theory of the term structure

Accepted Answer

A) indicates that today's long-term interest rate equals the average of short-term interest rates that people expect to occur over the life of the long-term bond. 
B) assumes that bonds of different maturities are perfect substitutes. 
C) suggests that markets for bonds of different maturities are completely separate because people have different preferences. 
D) does none of the above. 
A) indicates that today's long-term interest rate equals the average of short-term interest rates that people expect to occur over the life of the long-term bond. 
B) assumes that bonds of different maturities are perfect substitutes. 
C) suggests that markets for bonds of different maturities are completely separate because people have different preferences. 
D) does none of the above.

Question 18

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

Question 19

If income tax rates rise, then

Accepted Answer

A) the prices of municipal bonds will fall. 
B) the prices of Treasury bonds will rise. 
C) the interest rate on Treasury bonds will rise. 
D) the interest rate on municipal bonds will rise. 
A) the prices of municipal bonds will fall. 
B) the prices of Treasury bonds will rise. 
C) the interest rate on Treasury bonds will rise. 
D) the interest rate on municipal bonds will rise.

Question 20

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. 
E) medium-term interest rates are below 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. 
E) medium-term interest rates are below both short-term and long-term interest rates.

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

The spread between the interest rates on bonds with default risk and default-free bonds is called the risk premium.

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

What is meant by the risk structure of interest rates?

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 ________.

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

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

According to the expectations theory of the term structure,

Explain why the liquidity premium theory is so widely accepted.

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

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.

Bonds with relatively low risk of default are called

Why is it unlikely that the expectations theory alone is the correct theory for explaining the yield curve?

The ________ theory is the most widely accepted theory of the term structure of interest rates because it explains the major empirical facts about the term structure so well.

Corporate bonds are not as liquid as government bonds because

According to the market segmentation theory of the term structure,

Why would an increase in the income tax rate reduce borrowing costs to municipalities?

The liquidity premium theory of the term structure

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

If income tax rates rise, then

When yield curves are steeply upward-sloping,

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 Why Are They so Damaging to the Economy

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

Savings Associations and Credit Unions

Finance Companies

Filters

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 .

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