Question 1

A flight to quality refers to a shift by savers from

Accepted Answer

A)  bonds and into stocks. 
B)  stocks and into gold or other precious metals. 
C)  bonds and into real assets, such as real estate. 
D)  low-quality bonds and into high-quality bonds.

Question 2

The existence of rating agencies has

Accepted Answer

A)  lowered returns on corporate bonds. 
B)  raised returns on corporate bonds. 
C)  left returns on corporate bonds largely unaffected. 
D)  raised returns on both corporate bonds and Treasury securities.

Question 3

In 2016,as investors became more concerned with the default risk of bonds issued by the governments of Greece and Portugal relative to the default risk on bonds issued by the governments of Germany,France,and the Netherlands,the price of bonds issued by Greece and Portugal would have most likely ________ and the yield on those bonds would have most likely ________.

Accepted Answer

A)  increased; increased 
B)  increased; decreased 
C)  decreased; increased 
D)  decreased; decreased

Question 4

Which of the following is NOT a reason that credit ratings agencies became more relevant beginning in the late 1970s?

Accepted Answer

A)  The number of bond defaults rose due to periods of recession and inflation. 
B)  Rating agencies began to charge investors for their services. 
C)  Governments began to include bond ratings in their regulation of banks, mutual funds, and other financial firms. 
D)  Rating agencies began to rate bonds issued by foreign governments and firms.

Question 5

The risk premium of corporate bonds typically increases

Accepted Answer

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

Question 6

Suppose that savers become less willing to purchase medium-quality corporate bonds.The result will be that the prices of medium-quality corporate bonds will

Accepted Answer

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

Question 7

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.

Question 8

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

Accepted Answer

The answer of Why does the segmented markets theory suggest...

Question 9

A one-year bond has an interest rate of 3% and is expected to fall to 2.5% next year and 2% in two years.The term premium for a two-year bond is 0.3% and for a three-year bond is 0.5%.What are the interest rates on a two-year bond and three-year bond according to the liquidity premium theory?

Accepted Answer

The answer of A one-year bond has an interest rate...

Question 10

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.

Question 11

The greatest appeal of U.S.Treasury securities is that

Accepted Answer

A)  they have high yields. 
B)  they have no default risk. 
C)  the U.S. Treasury will repurchase them at any time. 
D)  their market prices fluctuate very little.

Question 12

If the expectations theory of the term structure is correct,would a reduction in the supply of thirty-year Treasury bonds affect their yields?

Accepted Answer

The answer of If the expectations theory of the term...

Question 13

Which bond would someone in a 35% tax bracket choose to buy: a municipal bond with an interest rate of 7% or a corporate bond with an interest rate of 10%?

Accepted Answer

The answer of Which bond would someone in a 35%...

Question 14

If the three-month Treasury bill has an interest rate of 0.2%,the ten-year Treasury bond has an interest rate of 2.75%,and a ten-year bond issued by Time Warner has an interest rate of 6%,what is the risk premium on Time Warner's bond?

Accepted Answer

The answer of If the three-month Treasury bill has an...

Question 15

Suppose the private bond rating agencies ceased to exist.What would be the impact on the bond market?

Accepted Answer

The answer of Suppose the private bond rating agencies ceased...

Question 16

Which of the following is the lowest rating given to an investment-grade bond by Moody's?

Accepted Answer

A)  Aa 
B)  A 
C)  Baa 
D)  B

Question 17

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

Question 18

In 2009,global investors began to regain confidence in the financial system and reversed the flight to safety that had taken place during the depths of the financial crisis.Make use of a graph of the market for corporate bonds to show the impact on corporate bonds' prices and yields.

Accepted Answer

The answer of In 2009,global investors began to regain confidence...

Question 19

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.

Question 20

During the financial crisis of 2007-09,the prices of U.S.Treasury securities

Accepted Answer

A)  rose and the price of corporate bonds declined. 
B)  fell relative to the prices of corporate bonds. 
C)  remained in the same relative position to the prices of corporate bonds. 
D)  were frozen by order of the federal government.

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