Question 1

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

Accepted Answer

not answered

Question 2

The Bush tax cut passed in 2001 reduces the top income tax bracket from 39 percent to 35 percent over the next ten years. As a result of this tax cut, the demand for municipal bonds should shift to the ________ and the interest rate on municipal bonds should ________.

Accepted Answer

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

Question 3

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

Accepted Answer

A) neither rise nor fall in the near future. 
B) remain relatively unchanged, but that long-term rates are expected to fall. 
C) neither rise nor fall, but that long-term rates are expected to rise moderately. 
D) rise moderately in the near future. 
A) neither rise nor fall in the near future. 
B) remain relatively unchanged, but that long-term rates are expected to fall. 
C) neither rise nor fall, but that long-term rates are expected to rise moderately. 
D) rise moderately in the near future. D

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

Contrast the liquidity premium theory to the market segmentation theory of the term structure of interest rates.

Accepted Answer

The answer of Contrast the liquidity premium theory to the...

Question 6

What is meant by the risk structure of interest rates?

Accepted Answer

The risk structure of interest rates ref

Question 7

The liquidity premium theory of the term structure

Accepted Answer

A) assumes investors tend to prefer short-term bonds because they have less interest-rate risk. 
B) assumes that interest rates on the long-term bond respond to demand and supply conditions for that bond. 
C) assumes that an average of expected short-term rates is an important component of interest rates on long-term bonds. 
D) assumes all of the above. 
E) assumes none of the above. 
A) assumes investors tend to prefer short-term bonds because they have less interest-rate risk. 
B) assumes that interest rates on the long-term bond respond to demand and supply conditions for that bond. 
C) assumes that an average of expected short-term rates is an important component of interest rates on long-term bonds. 
D) assumes all of the above. 
E) assumes none of the above.

Question 8

Discuss what is shown by a yield curve.

Accepted Answer

The answer of Discuss what is shown by a yield...

Question 9

According to the liquidity premium theory of the term structure, when the yield curve has its usual slope, the market expects

Accepted Answer

A) short-term interest rates to rise sharply. 
B) short-term interest rates to drop sharply. 
C) short-term interest rates to stay near their current levels. 
D) none of the above. 
A) short-term interest rates to rise sharply. 
B) short-term interest rates to drop sharply. 
C) short-term interest rates to stay near their current levels. 
D) none of the above.

Question 10

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

Accepted Answer

A) a mild rise in short-term interest rates in the near future and a mild decline further out in the future. 
B) constant short-term interest rates in the near future and further out in the future. 
C) a mild decline in short-term interest rates in the near future and a continuing mild decline further out in the future. 
D) constant short-term interest rates in the near future and a mild decline further out in the future. 
A) a mild rise in short-term interest rates in the near future and a mild decline further out in the future. 
B) constant short-term interest rates in the near future and further out in the future. 
C) a mild decline in short-term interest rates in the near future and a continuing mild decline further out in the future. 
D) constant short-term interest rates in the near future and a mild decline further out in the future.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) market segmentation theory 
B) expectations theory 
C) liquidity premium theory 
D) both A and B of the above 
E) both A and C of the above 
A) market segmentation theory 
B) expectations theory 
C) liquidity premium theory 
D) both A and B of the above 
E) both A and C of the above

Question 13

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 14

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 15

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

Accepted Answer

A) Callable 
B) Municipal 
C) Corporate Aaa 
D) U)S. Treasury 
A) Callable 
B) Municipal 
C) Corporate Aaa 
D) U)S. Treasury

Question 16

According to the liquidity premium theory of the term structure,

Accepted Answer

A) because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time. 
B) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. 
C) because of the positive term premium, the yield curve cannot be downward-sloping. 
D) all of the above. 
E) only A and B of the above. 
A) because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time. 
B) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. 
C) because of the positive term premium, the yield curve cannot be downward-sloping. 
D) all of the above. 
E) only A and B of the above.

Question 17

According to the liquidity premium theory of the term structure,

Accepted Answer

A) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a liquidity premium. 
B) buyers of bonds may prefer bonds of one maturity over another, yet interest rates on bonds of different maturities move together over time. 
C) even with a positive liquidity premium, if future short-term interest rates are expected to fall significantly, then the yield curve will be downward-sloping. 
D) all of the above. 
E) only A and B of the above. 
A) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a liquidity premium. 
B) buyers of bonds may prefer bonds of one maturity over another, yet interest rates on bonds of different maturities move together over time. 
C) even with a positive liquidity premium, if future short-term interest rates are expected to fall significantly, then the yield curve will be downward-sloping. 
D) all of the above. 
E) only A and B of the above.

Question 18

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 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) 1 percent. 
B) 2 percent. 
C) 4 percent. 
D) none of the above. 
A) 1 percent. 
B) 2 percent. 
C) 4 percent. 
D) none of the above.

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

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

The Bush tax cut passed in 2001 reduces the top income tax bracket from 39 percent to 35 percent over the next ten years. As a result of this tax cut, the demand for municipal bonds should shift to the ________ and the interest rate on municipal bonds should ________.

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

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.

Contrast the liquidity premium theory to the market segmentation theory of the term structure of interest rates.

What is meant by the risk structure of interest rates?

The liquidity premium theory of the term structure

Discuss what is shown by a yield curve.

According to the liquidity premium theory of the term structure, when the yield curve has its usual slope, the market expects

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

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

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

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 ________.

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

According to the liquidity premium theory of the term structure,

According to the liquidity premium theory of the term structure,

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

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

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

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

The Bush tax cut passed in 2001 reduces the top income tax bracket from 39 percent to 35 percent over the next ten years. As a result of this tax cut, the demand for municipal bonds should shift to the and the interest rate on municipal bonds should .

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 .