Question 1

Which of the following is true of the segmented markets theory?

Accepted Answer

A)  It assumes that borrowers have particular periods for which they want to borrow. 
B)  It assumes that lenders always lend for short periods. 
C)  It provides a good explanation for why yield curves usually slope upward. 
D)  It assumes that instruments with different maturities are perfect substitutes. 
A)  It assumes that borrowers have particular periods for which they want to borrow. 
B)  It assumes that lenders always lend for short periods. 
C)  It provides a good explanation for why yield curves usually slope upward. 
D)  It assumes that instruments with different maturities are perfect substitutes. A

Question 2

Which of the following assigns widely-followed bond ratings?

Accepted Answer

A)  Standard & Poor's Corporation 
B)  Securities and Exchange Commission 
C)  Federal Reserve 
D)  IBM 
A)  Standard & Poor's Corporation 
B)  Securities and Exchange Commission 
C)  Federal Reserve 
D)  IBM A

Question 3

The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that

Accepted Answer

A)  yield curves usually slope upward. 
B)  yield curves usually slope downward. 
C)  instruments with different maturities are perfect substitutes. 
D)  savers are usually risk averse. 
A)  yield curves usually slope upward. 
B)  yield curves usually slope downward. 
C)  instruments with different maturities are perfect substitutes. 
D)  savers are usually risk averse. C

Question 4

Which of the following bond ratings by Moody's Investors Service would NOT be considered to be below investment grade?

Accepted Answer

A)  Baa 
B)  Ba 
C)  B 
D)  All of these ratings are considered below investment grade. 
A)  Baa 
B)  Ba 
C)  B 
D)  All of these ratings are considered below investment grade.

Question 5

Default risk arises from the fact that

Accepted Answer

A)  borrowers differ in their ability to repay in full the principal and interest required by a loan agreement. 
B)  the bond price drops when interest rates rise. 
C)  it is inherently riskier to wait for a capital gain than to receive an immediate interest payment. 
D)  interest rates are far more likely to go up than to go down. 
A)  borrowers differ in their ability to repay in full the principal and interest required by a loan agreement. 
B)  the bond price drops when interest rates rise. 
C)  it is inherently riskier to wait for a capital gain than to receive an immediate interest payment. 
D)  interest rates are far more likely to go up than to go down.

Question 6

Municipal bonds are issued

Accepted Answer

A)  only by local governments. 
B)  only by state governments. 
C)  by both state and local governments. 
D)  by the federal government, and by state and local governments. 
A)  only by local governments. 
B)  only by state governments. 
C)  by both state and local governments. 
D)  by the federal government, and by state and local governments.

Question 7

The key assumption of the liquidity premium theory is that investors

Accepted Answer

A)  view bonds of different maturities as perfect substitutes. 
B)  view bonds of different maturities as completely unsubstitutable. 
C)  always choose the bond with the highest expected return, regardless of maturity. 
D)  care about both expected returns and time to maturity. 
A)  view bonds of different maturities as perfect substitutes. 
B)  view bonds of different maturities as completely unsubstitutable. 
C)  always choose the bond with the highest expected return, regardless of maturity. 
D)  care about both expected returns and time to maturity.

Question 8

The yield on a thirty-year Treasury bond is 8% at the same time as the yield on two-year Treasury note is 5%.This occurrence

Accepted Answer

A)  indicates that the yield curve is downward sloping. 
B)  is well explained by the segmented markets theory. 
C)  is largely explained by the favorable tax treatment of Treasury notes. 
D)  indicates that the bond market is anticipating that inflation will fall. 
A)  indicates that the yield curve is downward sloping. 
B)  is well explained by the segmented markets theory. 
C)  is largely explained by the favorable tax treatment of Treasury notes. 
D)  indicates that the bond market is anticipating that inflation will fall.

Question 9

During the financial crisis of 2007-2009,

Accepted Answer

A)  mortgage-backed securities became more liquid. 
B)  information costs of mortgage-backed securities rose. 
C)  information costs of mortgage-backed securities declined. 
D)  the tax treatment of mortgage-backed securities was changed. 
A)  mortgage-backed securities became more liquid. 
B)  information costs of mortgage-backed securities rose. 
C)  information costs of mortgage-backed securities declined. 
D)  the tax treatment of mortgage-backed securities was changed.

Question 10

The risk premium of corporate bonds typically increases

Accepted Answer

A)  when the average price of corporate bonds increase. 
B)  during a recession. 
C)  when the interest rates on corporate bonds decreases. 
D)  when the risk premium on treasury bonds increases. 
A)  when the average price of corporate bonds increase. 
B)  during a recession. 
C)  when the interest rates on corporate bonds decreases. 
D)  when the risk premium on treasury bonds increases.

Question 11

Under the liquidity premium theory the shape of the yield curve depends on

Accepted Answer

A)  the relative return of investments in common stocks versus investments in corporate bonds. 
B)  the size of the federal government's budget deficit. 
C)  government tax treatment of long-term versus short-term bonds. 
D)  the expected pattern of future short-term rates and the size of the term premium at each maturity. 
A)  the relative return of investments in common stocks versus investments in corporate bonds. 
B)  the size of the federal government's budget deficit. 
C)  government tax treatment of long-term versus short-term bonds. 
D)  the expected pattern of future short-term rates and the size of the term premium at each maturity.

Question 12

Which of the following is considered a default-risk-free instrument?

Accepted Answer

A)  a three-month commercial paper issued by GE 
B)  a share of stock issued by Google 
C)  a three-month Treasury bill 
D)  a ten-year bond issued by Intel 
A)  a three-month commercial paper issued by GE 
B)  a share of stock issued by Google 
C)  a three-month Treasury bill 
D)  a ten-year bond issued by Intel

Question 13

The risk structure of interest rates refers to

Accepted Answer

A)  the amount of additional interest necessary to compensate savers for the greater risk of default on some bonds. 
B)  the relationship among the interest rates on similar bonds with different maturities. 
C)  the relationship among the interest rates on bonds with the same maturity. 
D)  the amount of additional yield necessary to compensate savers for the lesser liquidity of some bonds. 
A)  the amount of additional interest necessary to compensate savers for the greater risk of default on some bonds. 
B)  the relationship among the interest rates on similar bonds with different maturities. 
C)  the relationship among the interest rates on bonds with the same maturity. 
D)  the amount of additional yield necessary to compensate savers for the lesser liquidity of some bonds.

Question 14

The term structure of interest rates

Accepted Answer

A)  represents the relationship among the interest rates on bonds that are otherwise similar but that have different maturities. 
B)  reflects differing tax treatment received by different instruments. 
C)  always results in an upward-sloping yield curve. 
D)  usually results in a downward-sloping yield curve. 
A)  represents the relationship among the interest rates on bonds that are otherwise similar but that have different maturities. 
B)  reflects differing tax treatment received by different instruments. 
C)  always results in an upward-sloping yield curve. 
D)  usually results in a downward-sloping yield curve.

Question 15

Discuss what happened to the market prices on corporate securities relative to government securities during the Great Depression.

Accepted Answer

The Great Depression was one of sharp ec

Question 16

Suppose that your marginal federal income tax rate is 30%,the sum of your marginal state and local tax rates is 5%,and the yield on a thirty-year corporate bond is 10%.You would be indifferent between buying this corporate bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity,risk,and costs of information)if the municipal bond has a yield of

Accepted Answer

A)  6.5%. 
B)  7.0%. 
C)  9.5%. 
D)  10.0%. 
A)  6.5%. 
B)  7.0%. 
C)  9.5%. 
D)  10.0%.

Question 17

The segmented markets theory

Accepted Answer

A)  has difficulty explaining why yield curves usually slope up. 
B)  has difficulty explaining why yield curves usually slope down. 
C)  has difficulty explaining why yields on instruments of different maturities tend to move together. 
D)  provides a good explanation of why yields on instruments of different maturities tend to move together. 
A)  has difficulty explaining why yield curves usually slope up. 
B)  has difficulty explaining why yield curves usually slope down. 
C)  has difficulty explaining why yields on instruments of different maturities tend to move together. 
D)  provides a good explanation of why yields on instruments of different maturities tend to move together.

Question 18

Currently,a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%.What is the risk premium of the typical A-rated ten-year corporate bond with a yield of 5.5%?

Accepted Answer

A)  0.5% 
B)  0.8% 
C)  5.5% 
D)  1.17% 
A)  0.5% 
B)  0.8% 
C)  5.5% 
D)  1.17%

Question 19

If the expected path of interest rates on one-year bonds over the next five years is 2%,4%,3%,2%,and 1%,the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of

Accepted Answer

A)  one year. 
B)  two years. 
C)  three years. 
D)  five years. 
A)  one year. 
B)  two years. 
C)  three years. 
D)  five years.

Question 20

Suppose that savers become much more willing to purchase a certain type of municipal bond.The result will be that the bond's price will

Accepted Answer

A)  fall relative to the price of U.S. Treasury securities but rise relative to the price of corporate bonds. 
B)  rise relative to the price of U.S. Treasury securities but fall relative to the price of corporate bonds. 
C)  rise relative to the prices of U.S. Treasury securities and corporate bonds. 
D)  fall relative to the prices of U.S. Treasury securities and corporate bonds. 
A)  fall relative to the price of U.S. Treasury securities but rise relative to the price of corporate bonds. 
B)  rise relative to the price of U.S. Treasury securities but fall relative to the price of corporate bonds. 
C)  rise relative to the prices of U.S. Treasury securities and corporate bonds. 
D)  fall relative to the prices of U.S. Treasury securities and corporate bonds.

Which of the following is true of the segmented markets theory?

Which of the following assigns widely-followed bond ratings?

The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that

Which of the following bond ratings by Moody's Investors Service would NOT be considered to be below investment grade?

Default risk arises from the fact that

Municipal bonds are issued

The key assumption of the liquidity premium theory is that investors

The yield on a thirty-year Treasury bond is 8% at the same time as the yield on two-year Treasury note is 5%.This occurrence

During the financial crisis of 2007-2009,

The risk premium of corporate bonds typically increases

Under the liquidity premium theory the shape of the yield curve depends on

Which of the following is considered a default-risk-free instrument?

The risk structure of interest rates refers to

The term structure of interest rates

Discuss what happened to the market prices on corporate securities relative to government securities during the Great Depression.

The segmented markets theory

Currently,a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%.What is the risk premium of the typical A-rated ten-year corporate bond with a yield of 5.5%?

If the expected path of interest rates on one-year bonds over the next five years is 2%,4%,3%,2%,and 1%,the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of

Suppose that savers become much more willing to purchase a certain type of municipal bond.The result will be that the bond's price will

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Stock Market, information, and Financial Market Efficiency

Derivatives and Derivative Markets

The Market for Foreign Exchange

Transactions Costs, asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Investment Banks, mutual Funds, hedge Funds, and the Shadow Banking System

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I: the Aggregate Demand and Aggregate Supply Model

Monetary Theory Ii: the Is-Mp Model

Filters

Exam 5: The Risk Structure and Term Structure of Interest Rates

Which of the following is true of the segmented markets theory?

Which of the following assigns widely-followed bond ratings?

The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that

Which of the following bond ratings by Moody's Investors Service would NOT be considered to be below investment grade?

Default risk arises from the fact that

Municipal bonds are issued

The key assumption of the liquidity premium theory is that investors

The yield on a thirty-year Treasury bond is 8% at the same time as the yield on two-year Treasury note is 5%.This occurrence

During the financial crisis of 2007-2009,

The risk premium of corporate bonds typically increases

Under the liquidity premium theory the shape of the yield curve depends on

Which of the following is considered a default-risk-free instrument?

The risk structure of interest rates refers to

The term structure of interest rates

Discuss what happened to the market prices on corporate securities relative to government securities during the Great Depression.

The segmented markets theory

Currently,a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%.What is the risk premium of the typical A-rated ten-year corporate bond with a yield of 5.5%?

If the expected path of interest rates on one-year bonds over the next five years is 2%,4%,3%,2%,and 1%,the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of

Suppose that savers become much more willing to purchase a certain type of municipal bond.The result will be that the bond's price will

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Stock Market, information, and Financial Market Efficiency

Derivatives and Derivative Markets

The Market for Foreign Exchange

Transactions Costs, asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Investment Banks, mutual Funds, hedge Funds, and the Shadow Banking System

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I: the Aggregate Demand and Aggregate Supply Model

Monetary Theory Ii: the Is-Mp Model

Filters