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

According to the expectations theory of the term structure,

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.

When yield curves are steeply upward-sloping,

If income tax rates were lowered, then

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

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

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

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

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

Which of the following statements are true?

Holding everything else the same, if a corporation's earnings rise, then the default risk on its bonds will ________ and the expected return on those bonds will ________.

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.

According to the market segmentation theory of the term structure,

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.

When the corporate bond market becomes less liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.

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

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

Yield curves can be classified as

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

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 ________.