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

Why did some economists and policymakers think ratings agencies had a conflict of interest leading up to the Financial Crisis of 2007-2009?

The expectations theory suggests that

The liquidity premium theory holds that investors

Default risk

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 thirty-year U.S.Treasury bonds is 10%.You would be indifferent between buying a thirty-year Treasury 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

Many savers are willing to accept a lower interest rate on municipal bonds than on comparable instruments because

Steve Forbes has run for president twice on a program of a "flat tax." Under a flat tax,there would be only one tax bracket for the federal income tax and most tax deductions and tax exemptions would be eliminated.Suppose that Forbes wins the 2012 presidential election.What would be the likely impact on the market for municipal bonds?

Why does the segmented markets theory suggest think that bonds of different maturities are not perfect substitutes for each other?

The default risk premium is

Differences in the taxation of returns

The expectations theory

Describe the facts found in the bond market about the relationship between interest rates on bonds of different maturities.

What are the economic implications of an inverted yield curve?

When the yield curve is downward-sloping,

How does the liquidity premium theory explain an upward sloping yield curve during normal economic times?

Under the expectations theory,an upward-sloping yield curve indicates that investors expect future short-term rates to

Interest and capital gains are taxed differently in the United States in that

u.S.Treasury securities

The term structure is usually defined with yields on which securities?

Financial instruments with high information costs