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

If a bond has a favorable tax treatment, its required interest rate (all else equal)

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

________ bonds are exempt from federal income taxes.

(I)An increase in default risk on corporate bonds shifts the demand curve for corporate bonds to the right. (II)An increase in default risk on corporate bonds shifts the demand curve for Treasury bonds to the left.

Risk occurs when the issuer of the bond is unable or unwilling to make interest payments when promised or pay off the face value when the bond matures.

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

________ cannot explain the empirical fact that interest rates on bonds of different maturities tend to move together.

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

Typically, yield curves are

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

If income tax rates rise, then

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

The risk premium on corporate bonds becomes smaller if

________ are investment advisory firms that rate the quality of corporate and municipal bonds in terms of probability of default.

The term structure of interest rates is

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

According to the expectations theory of the term structure,

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

Holding everything else constant, if a corporation begins to suffer large losses, then the default risk on its bonds will ________ and the expected return on those bonds will ________.

If a corporation's earnings rise, then the default risk on its bonds will ________ and the equilibrium interest rate on these bonds will ________.