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 1 percent, 2 percent, 3 percent, 4 percent, and 5 percent, then the pure expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of

The risk premium on corporate bonds becomes smaller as the liquidity of the bonds falls.

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

A decrease in marginal tax rates would likely have the effect of ________ the demand for municipal bonds and ________ the demand for U.S. government bonds.

A steep upward-sloping yield curve indicates that short-term interest rates are expected to

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

An increase in the marginal tax rate would likely increase the demand for municipal bonds, and decrease the demand for U.S. government bonds.

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

An increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds and ________ the demand for U.S. government bonds.

Explain why a flight to quality occurred following the subprime collapse and how this affected the interest rates on lower-quality corporate bonds and Treasury bonds.

According to the liquidity premium theory of the term structure,

If the expected path of one-year interest rates over the next four years is 5 percent, 4 percent, 2 percent, and 1 percent, then the pure expectations theory predicts that today's interest rate on the four-year bond is

Bonds with relatively high risk of default are called

(I)If a corporation suffers big losses, the demand for its bonds will rise because of the higher interest rates the firm must pay. (II)The spread between the interest rates on bonds with default risk and default-free bonds is called the risk premium.

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

According to the expectations theory of the term structure,

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 ________.

The term structure of interest rates is

________ bonds are the most liquid of all long-term bonds.

If a corporation begins to suffer large losses, then the default risk on its bonds will ________ and the equilibrium interest rate on these bonds will ________.