Question 1

Interest on most bonds issued by states is usually exempt from:

Accepted Answer

A)  state income tax but not federal.
B)  from federal income tax but not state.
C)  both state and federal income taxes.
D)  from city income taxes.

Question 2

Suppose the economy has an inverted yield curve.According to the Expectations Hypothesis, which of the following interpretations could be used to explain this?

Accepted Answer

A)  Interest rates are expected to fall in the future.
B)  Investors prefer bonds with less default risk.
C)  Investors prefer bonds with less interest-rate risk.
D)  The term spread is positive.

Question 3

When the growth rate of the economy slows we would expect:

Accepted Answer

A)  the risk to increase for U.S.Treasury securities.
B)  the risk spread to increase more between U.S.Treasury Securities and Aaa securities than between Aaa and Baa securities.
C)  the risk spread to increase more between Aaa and Baa securities than U.S.Treasuries and Aaa securities.
D)  investors to purchase more junk bonds in search of a higher yield.

Question 4

Which of the following statements pertaining to the yield curve is not true?

Accepted Answer

A)  Yield curves usually slope upwards.
B)  The yield curve shows the difference in default risk between securities.
C)  The yield curve shows the relationship among bonds with the same risk characteristics but different maturities.
D)  The yield curve can be flat or downward sloping depending on market conditions.

Question 5

Which fact about the term structure is the Expectations Theory able to explain?

Accepted Answer

A)  Why interest rates on bonds with different terms to maturity tend to move together over time.
B)  Why yields on short-term bonds are more volatile than yields on long-term bonds.
C)  Why longer-term yields tend to be higher than shorter-term yields.
D)  Why long-term bonds usually are less liquid than short-term bonds with the same default risk.

Question 6

Why do economists pay particular attention to inverted yield curves?

Accepted Answer

Inverted yield curves can be h...

Question 7

A borrower who has to pay an interest rate of 8% rather than 6% due to risk spread will pay:

Accepted Answer

A)  $20 more in interest annually for every $100 borrowed.
B)  33.3% higher interest in dollar terms.
C)  2% in net interest.
D)  less interest in total over the life of the loan.

Question 8

Tax-exempt bonds:

Accepted Answer

A)  generate higher returns for the bondholder when purchased through a tax-exempt retirement account.
B)  are not affected by changes in yields on taxable bonds.
C)  are most beneficial to those who pay higher income tax rates.
D)  include U.S.Treasury securities because the Internal Revenue Service does not charge income tax on interest earned from these bonds.

Question 9

The lowest rating for an investment grade bond assigned by Moody's is:

Accepted Answer

A)  Baa.
B)  A.
C)  BBB.
D)  Aa.

Question 10

Describe the concept of flight to quality in terms of the Russian government default of August 1998.

Accepted Answer

The concept of flight to quality implies...

Question 11

Bonds rated as "highly speculative" are:

Accepted Answer

A)  rated so because they guarantee high returns for the buyer.
B)  commonly referred to as junk bonds.
C)  ranked just above investment grade by Standard & Poor's.
D)  rated so because they do not have any default risk.

Question 12

When we compare the graphs of GDP growth over time to the corresponding risk spread on Baa bonds compared to 10-year U.S.Treasury bonds, what relationship can be inferred?

Accepted Answer

There seems to be an inverse r...

Question 13

According to the Expectations Hypothesis, if investors believed that, for a given holding period, the average of the expected future short-term yields was greater than the long-term yield for the holding period, they would act so as to drive:

Accepted Answer

A)  down the price of the short-term bond and drive up the price of the long-term bond.
B)  up the price of the short-term bond and drive down the price of the long-term bond.
C)  up the prices of both the short- and long-term bonds.
D)  down the prices of both the short- and long-term bonds.

Question 14

Investors usually obtain bond ratings from:

Accepted Answer

A)  private bond-rating agencies.
B)  the annual tax returns of the issuer.
C)  the U.S.government from publicly available information.
D)  public information made available by the bond issuers.

Question 15

We would expect the risk spread between Baa bonds and U.S.Treasury securities of the same maturities to:

Accepted Answer

A)  widen during periods of economic recession.
B)  remain relatively constant over the business cycle.
C)  decrease during economic slowdowns.
D)  increase during economic growth periods.

Question 16

The interest-rate risk that is associated with bond investing:

Accepted Answer

A)  exists even if an investor plans on holding the bond to maturity.
B)  arises because of a mismatch between the investor's investment horizon and the maturity of the bond.
C)  is not reflected in the risk premium.
D)  can be eliminated by holding only consols.

Question 17

We would expect the relationship between the risk spread on Baa bonds and U.S.Treasury securities of similar maturities to:

Accepted Answer

A)  vary directly with economic growth.
B)  show no variation over the business cycle.
C)  vary inversely with economic growth.
D)  be uncorrelated with economic growth.

Question 18

Which of the following is true?

Accepted Answer

A)  Long-term bond yields move together but short-term yields do not.
B)  Short-term bond yields move together but long-term yields do not.
C)  U.S.Treasury bill yields are lower than the yields on commercial paper.
D)  Long-term bond yields are usually the same as short-term yields.

Question 19

The Expectations Hypothesis assumes:

Accepted Answer

A)  a high level of uncertainty regarding the future of long-term yields.
B)  investors know the yields on bonds today and form expectations of the yields on short-term bonds in future time periods.
C)  securities of different maturities are not perfect substitutes for each other.
D)  the risk premium increases with longer maturities.

Question 20

A flight to quality should result in the:

Accepted Answer

A)  price of U.S.Treasury Securities rising and the price of corporate bonds rising.
B)  yield on U.S.Treasury Securities falling and the price of corporate bonds rising.
C)  yield on corporate bonds falling and the price of U.S.Treasury Securities rising.
D)  yield on U.S.Treasury securities falling and the price of corporate bonds falling.

Exam 7: The Risk and Term Structure of Interest Rates

A borrower who has to pay an interest rate of 8% rather than 6% due to risk spread will pay:

Correct AnswerverifiedShow Answer

Why do economists pay particular attention to inverted yield curves?

Correct AnswerverifiedInverted yield curves can be h...View AnswerShow Answer

Bonds rated as "highly speculative" are:

Correct AnswerverifiedShow Answer

Tax-exempt bonds:

Correct AnswerverifiedShow Answer

According to the Expectations Hypothesis, if investors believed that, for a given holding period, the average of the expected future short-term yields was greater than the long-term yield for the holding period, they would act so as to drive:

Correct AnswerverifiedShow Answer

When the growth rate of the economy slows we would expect:

Correct AnswerverifiedShow Answer

Describe the concept of flight to quality in terms of the Russian government default of August 1998.

Correct AnswerverifiedThe concept of flight to quality implies...View AnswerShow Answer

When we compare the graphs of GDP growth over time to the corresponding risk spread on Baa bonds compared to 10-year U.S.Treasury bonds, what relationship can be inferred?

Correct AnswerverifiedThere seems to be an inverse r...View AnswerShow Answer

Which of the following statements pertaining to the yield curve is not true?

Correct AnswerverifiedShow Answer

Interest on most bonds issued by states is usually exempt from:

Correct AnswerverifiedShow Answer

A flight to quality should result in the:

Correct AnswerverifiedShow Answer

Which of the following is true?

Correct AnswerverifiedShow Answer

We would expect the risk spread between Baa bonds and U.S.Treasury securities of the same maturities to:

Correct AnswerverifiedShow Answer

Suppose the economy has an inverted yield curve.According to the Expectations Hypothesis, which of the following interpretations could be used to explain this?

Correct AnswerverifiedShow Answer

The interest-rate risk that is associated with bond investing:

Correct AnswerverifiedShow Answer

The Expectations Hypothesis assumes:

Correct AnswerverifiedShow Answer

The lowest rating for an investment grade bond assigned by Moody's is:

Correct AnswerverifiedShow Answer

Investors usually obtain bond ratings from:

Correct AnswerverifiedShow Answer

We would expect the relationship between the risk spread on Baa bonds and U.S.Treasury securities of similar maturities to:

Correct AnswerverifiedShow Answer

Which fact about the term structure is the Expectations Theory able to explain?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified
Inverted yield curves can be h...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The concept of flight to quality implies...
View Answer

Correct Answer
verified
There seems to be an inverse r...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified