Question 1

-When short-term interest rates are expected to fall sharply in the future,the yield curve will

Accepted Answer

A) slope up. 
B) be flat. 
C) be inverted. 
D) be an inverted U shape.

Question 2

A(n)________ in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds,all else equal.

Accepted Answer

A) increase; increase; increase 
B) increase; decrease; increase 
C) decrease; increase; increase 
D) decrease; decrease;decrease

Question 3

If the expected path of 1-year interest rates over the next four years is 5 percent,4 percent,2 percent,and 1 percent,then the expectations theory predicts that today's interest rate on the four-year bond is

Accepted Answer

A) 1 percent. 
B) 2 percent. 
C) 3 percent. 
D) 4 percent.

Question 4

Other things being equal,a decrease in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the ________.

Accepted Answer

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

Question 5

Corporate bonds are not as liquid as government bonds because

Accepted Answer

A) fewer corporate bonds for any one corporation are traded,making them more costly to sell. 
B) the corporate bond rating must be calculated each time they are traded. 
C) corporate bonds are not callable. 
D) corporate bonds cannot be resold.

Question 6

-A ________ yield curve predicts a future increase in inflation.

Accepted Answer

A) steeply upward sloping 
B) slight upward sloping 
C) flat 
D) downward sloping

Question 7

A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium.

Accepted Answer

A) positive; raise 
B) positive; lower 
C) negative; raise 
D) negative; lower

Question 8

When yield curves are flat,

Accepted Answer

A) long-term interest rates are above short-term interest rates. 
B) short-term interest rates are above long-term interest rates. 
C) short-term interest rates are about the same as long-term interest rates. 
D) medium-term interest rates are above both short-term and long-term interest rates.

Question 9

According to the expectations theory of the term structure

Accepted Answer

A) the interest rate on long-term bonds will exceed the average of short-term interest rates that people expect to occur over the life of the long-term bonds,because of their preference for short-term securities. 
B) interest rates on bonds of different maturities move together over time. 
C) buyers of bonds prefer short-term to long-term bonds. 
D) buyers require an additional incentive to hold long-term bonds.

Question 10

The ________ of the term structure states the following: the interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of the long-term bond plus a term premium that responds to supply and demand conditions for that bond.

Accepted Answer

A) segmented markets theory 
B) expectations theory 
C) liquidity premium theory 
D) separable markets theory

Question 11

According to this theory of the term structure,bonds of different maturities are not substitutes for one another.

Accepted Answer

A) Segmented markets theory 
B) Expectations theory 
C) Liquidity premium theory 
D) Separable markets theory

Question 12

The expectations theory and the segmented markets theory do not explain the facts very well,but they provide the groundwork for the most widely accepted theory of the term structure of interest rates,

Accepted Answer

A) the Keynesian theory. 
B) separable markets theory. 
C) liquidity premium theory. 
D) the asset market approach.

Question 13

Bonds with no default risk are called

Accepted Answer

A) flower bonds. 
B) no-risk bonds. 
C) default-free bonds. 
D) zero-risk bonds.

Question 14

The Bush tax cut reduced the top income tax bracket from 39% to 35% over a ten-year period.Supply and demand analysis predicts the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds.

Accepted Answer

A) higher; lower 
B) lower; lower 
C) higher; higher 
D) lower; higher

Question 15

An increase in the liquidity of corporate bonds,other things being equal,shifts the demand curve for corporate bonds 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

Question 16

The term structure of interest rates is

Accepted Answer

A) the relationship among interest rates of different bonds with the same maturity. 
B) the structure of how interest rates move over time. 
C) the relationship among the term to maturity of different bonds. 
D) the relationship among interest rates on bonds with different maturities.

Question 17

If the expected path of 1-year interest rates over the next five years is 1 percent,2 percent,3 percent,4 percent,and 5 percent,the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of

Accepted Answer

A) two years. 
B) three years. 
C) four years. 
D) five years.

Question 18

As default risk increases,the expected return on corporate bonds ________,and the return becomes ________ uncertain,everything else held constant.

Accepted Answer

A) increases; less 
B) increases; more 
C) decreases; less 
D) decreases; more

Question 19

When the Treasury 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 ________.

Accepted Answer

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

Question 20

If the yield curve has a mild upward slope,the liquidity premium theory (assuming a mild preference for shorter-term bonds)indicates that the market is predicting

Accepted Answer

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

Exam 6: The Risk and Term Structure of Interest Rates

-When short-term interest rates are expected to fall sharply in the future,the yield curve will

A(n) in the riskiness of corporate bonds will the price of corporate bonds and the yield on corporate bonds,all else equal.

If the expected path of 1-year interest rates over the next four years is 5 percent,4 percent,2 percent,and 1 percent,then the expectations theory predicts that today's interest rate on the four-year bond is

Other things being equal,a decrease in the default risk of corporate bonds shifts the demand curve for corporate bonds to the and the demand curve for Treasury bonds to the .

Corporate bonds are not as liquid as government bonds because

-A ________ yield curve predicts a future increase in inflation.

A bond with default risk will always have a risk premium and an increase in its default risk will the risk premium.

When yield curves are flat,

According to the expectations theory of the term structure

The ________ of the term structure states the following: the interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of the long-term bond plus a term premium that responds to supply and demand conditions for that bond.

According to this theory of the term structure,bonds of different maturities are not substitutes for one another.

The expectations theory and the segmented markets theory do not explain the facts very well,but they provide the groundwork for the most widely accepted theory of the term structure of interest rates,

Bonds with no default risk are called

The Bush tax cut reduced the top income tax bracket from 39% to 35% over a ten-year period.Supply and demand analysis predicts the impact of this change was a interest rate on municipal bonds and a interest rate on Treasury bonds.

An increase in the liquidity of corporate bonds,other things being equal,shifts the demand curve for corporate bonds to the and the demand curve for Treasury bonds shifts to the .

The term structure of interest rates is

If the expected path of 1-year interest rates over the next five years is 1 percent,2 percent,3 percent,4 percent,and 5 percent,the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of

As default risk increases,the expected return on corporate bonds ,and the return becomes uncertain,everything else held constant.

When the Treasury 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 .

If the yield curve has a mild upward slope,the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting

Exam 6: The Risk and Term Structure of Interest Rates

-When short-term interest rates are expected to fall sharply in the future,the yield curve will

A(n) ________ in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds,all else equal.

If the expected path of 1-year interest rates over the next four years is 5 percent,4 percent,2 percent,and 1 percent,then the expectations theory predicts that today's interest rate on the four-year bond is

Other things being equal,a decrease in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the ________.

Corporate bonds are not as liquid as government bonds because

-A ________ yield curve predicts a future increase in inflation.

A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium.

When yield curves are flat,

According to the expectations theory of the term structure

The ________ of the term structure states the following: the interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of the long-term bond plus a term premium that responds to supply and demand conditions for that bond.

According to this theory of the term structure,bonds of different maturities are not substitutes for one another.

The expectations theory and the segmented markets theory do not explain the facts very well,but they provide the groundwork for the most widely accepted theory of the term structure of interest rates,

Bonds with no default risk are called

The Bush tax cut reduced the top income tax bracket from 39% to 35% over a ten-year period.Supply and demand analysis predicts the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds.

An increase in the liquidity of corporate bonds,other things being equal,shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________.

The term structure of interest rates is

If the expected path of 1-year interest rates over the next five years is 1 percent,2 percent,3 percent,4 percent,and 5 percent,the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of

As default risk increases,the expected return on corporate bonds ________,and the return becomes ________ uncertain,everything else held constant.

When the Treasury 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 ________.

If the yield curve has a mild upward slope,the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting

A(n) in the riskiness of corporate bonds will the price of corporate bonds and the yield on corporate bonds,all else equal.

Other things being equal,a decrease in the default risk of corporate bonds shifts the demand curve for corporate bonds to the and the demand curve for Treasury bonds to the .

A bond with default risk will always have a risk premium and an increase in its default risk will the risk premium.

The Bush tax cut reduced the top income tax bracket from 39% to 35% over a ten-year period.Supply and demand analysis predicts the impact of this change was a interest rate on municipal bonds and a interest rate on Treasury bonds.

An increase in the liquidity of corporate bonds,other things being equal,shifts the demand curve for corporate bonds to the and the demand curve for Treasury bonds shifts to the .

As default risk increases,the expected return on corporate bonds ,and the return becomes uncertain,everything else held constant.

When the Treasury 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 .