Question 1

When yield curves are steeply upward sloping,

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 2

The spread between interest rates on low quality corporate bonds and U.S. government bonds

Accepted Answer

A)   widened significantly during the Great Depression.
B)   narrowed significantly during the Great Depression.
C)   narrowed moderately during the Great Depression.
D)   did not change during the Great Depression.

Question 3

According to the liquidity premium theory of the term structure

Accepted Answer

A)   because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time.
B)   the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium.
C)   because of the positive term premium, the yield curve will not be observed to be downward sloping.
D)   the interest rate for each maturity bond is determined by supply and demand for that maturity bond.

Question 4

Which of the following statements are true?

Accepted Answer

A)   An increase in tax rates will increase the demand for Treasury bonds, lowering their interest rates.
B)   Because the tax-exempt status of municipal bonds was of little benefit to bond holders when tax rates were low, they had higher interest rates than U.S. government bonds before World War II.
C)   Interest rates on municipal bonds will be higher than comparable bonds without the tax exemption.
D)   Because coupon payments on municipal bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in lower income tax brackets.

Question 5

Everything else held constant, the interest rate on municipal bonds rises relative to the interest rate on Treasury securities when

Accepted Answer

A)   income tax rates are lowered.
B)   income tax rates are raised.
C)   municipal bonds become more widely traded.
D)   corporate bonds become riskier.

Question 6

If 1-year interest rates for the next three years are expected to be 4, 2, and 3 percent, and the 3-year term premium is 1 percent, than the 3-year bond rate will be

Accepted Answer

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

Question 7

If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five-year bond is

Accepted Answer

A)   4 percent.
B)   5 percent.
C)   6 percent.
D)   7 percent.

Question 8

According to the liquidity premium theory of the term structure, a flat yield curve indicates that short-term interest rates are expected to

Accepted Answer

A)   rise in the future.
B)   remain unchanged in the future.
C)   decline moderately in the future.
D)   decline sharply in the future.

Question 9

Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1 percent. The expectations theory of the term structure predicts that the current interest rate on 3-year bond is

Accepted Answer

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

Question 10

A decrease in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities, everything else held constant.

Accepted Answer

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

Question 11

If bonds with different maturities are perfect substitutes, then the ________ on these bonds must be equal.

Accepted Answer

A)   expected return
B)   surprise return
C)   surplus return
D)   excess return

Question 12

U.S. government bonds have no default risk because

Accepted Answer

A)   they are backed by the full faith and credit of the federal government.
B)   the federal government can increase taxes to pay its obligations.
C)   they are backed with gold reserves.
D)   they can be exchanged for silver at any time.

Question 13

-The steeply upward sloping yield curve in the figure above indicates that ________ interest rates are expected to ________ in the future.

Accepted Answer

A)   short-term; rise
B)   short-term; fall moderately
C)   short-term; remain unchanged
D)   long-term; fall moderately

Question 14

According to the liquidity premium theory of the term structure

Accepted Answer

A)   bonds of different maturities are not substitutes.
B)   if yield curves are downward sloping, then short-term interest rates are expected to fall by so much that, even when the positive term premium is added, long-term rates fall below short-term rates.
C)   yield curves should never slope downward.
D)   interest rates on bonds of different maturities do not move together over time.

Question 15

Which of the following long-term bonds has the highest interest rate?

Accepted Answer

A)   Corporate Baa bonds
B)   U.S. Treasury bonds
C)   Corporate Aaa bonds
D)   Municipal bonds

Question 16

When the Treasury bond market becomes more 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 17

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 18

According to the segmented markets theory of the term structure

Accepted Answer

A)   the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds.
B)   buyers of bonds do not prefer bonds of one maturity over another.
C)   interest rates on bonds of different maturities do not move together over time.
D)   buyers require an additional incentive to hold long-term bonds.

Question 19

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 20

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

Exam 6: The Risk and Term Structure of Interest Rates

According to the liquidity premium theory of the term structure

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According to the liquidity premium theory of the term structure

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When yield curves are steeply upward sloping,

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The spread between interest rates on low quality corporate bonds and U.S. government bonds

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-The steeply upward sloping yield curve in the figure above indicates that ________ interest rates are expected to ________ in the future.

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U.S. government bonds have no default risk because

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Everything else held constant, the interest rate on municipal bonds rises relative to the interest rate on Treasury securities when

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According to the segmented markets theory of the term structure

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A decrease in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities, everything else held constant.

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Which of the following long-term bonds has the highest interest rate?

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If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five-year bond is

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If 1-year interest rates for the next three years are expected to be 4, 2, and 3 percent, and the 3-year term premium is 1 percent, than the 3-year bond rate will be

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

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According to the liquidity premium theory of the term structure, a flat yield curve indicates that short-term interest rates are expected to

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Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1 percent. The expectations theory of the term structure predicts that the current interest rate on 3-year bond is

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Bonds with no default risk are called

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If bonds with different maturities are perfect substitutes, then the ________ on these bonds must be equal.

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When the Treasury bond market becomes more liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.

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

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Which of the following statements are true?

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-The steeply upward sloping yield curve in the figure above indicates that interest rates are expected to in the future.

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A decrease in the riskiness of corporate bonds will the yield on corporate bonds and the yield on Treasury securities, everything else held constant.

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

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When the Treasury bond market becomes more liquid, other things equal, the demand curve for corporate bonds shifts to the and the demand curve for Treasury bonds shifts to the .

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

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