Question 1

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 2

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 3

Which of the following securities has the lowest interest rate?

Accepted Answer

A)  Junk bonds
B)  U.S.Treasury bonds
C)  Investment-grade bonds
D)  Corporate Baa bonds

Question 4

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 5

If a corporation begins to suffer large losses,then the default risk on the corporate bond will

Accepted Answer

A)  increase and the bond's return will become more uncertain,meaning the expected return on the corporate bond will fall.
B)  increase and the bond's return will become less uncertain,meaning the expected return on the corporate bond will fall.
C)  decrease and the bond's return will become less uncertain,meaning the expected return on the corporate bond will fall.
D)  decrease and the bond's return will become less uncertain,meaning the expected return on the corporate bond will rise. A

Question 6

Everything else held constant,an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds,and ________ the demand for U.S.government bonds.

Accepted Answer

A)  increasing; increasing
B)  increasing; decreasing
C)  decreasing; increasing
D)  decreasing; decreasing

Question 7

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

Accepted Answer

A)  one year.
B)  two years.
C)  three years.
D)  four years.

Question 8

The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S.Treasury bonds.This is due to

Accepted Answer

A)  a reduction in risk.
B)  a reduction in maturity.
C)  a flight to quality.
D)  a flight to liquidity.

Question 9

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 10

Three factors explain the risk structure of interest rates:

Accepted Answer

A)  liquidity,default risk,and the income tax treatment of a security.
B)  maturity,default risk,and the income tax treatment of a security.
C)  maturity,liquidity,and the income tax treatment of a security.
D)  maturity,default risk,and the liquidity of a security.

Question 11

According to the expectations theory of the term structure,the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond.

Accepted Answer

A)  average
B)  sum
C)  difference
D)  multiple

Question 12

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 13

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 14

Use the following figure to answer the questions :

-The steeply upward sloping yield curve in the figure above indicates that

Accepted Answer

A)  short-term interest rates are expected to rise in the future.
B)  short-term interest rates are expected to fall moderately in the future.
C)  short-term interest rates are expected to fall sharply in the future.
D)  short-term interest rates are expected to remain unchanged in the future. A

Question 15

An inverted yield curve predicts that short-term interest rates

Accepted Answer

A)  are expected to rise in the future.
B)  will rise and then fall in the future.
C)  will remain unchanged in the future.
D)  will fall in the future.

Question 16

An increase in default risk on corporate bonds ________ the demand for these bonds,but ________ the demand for default-free bonds,everything else held constant.

Accepted Answer

A)  increases; lowers
B)  lowers; increases
C)  does not change; greatly increases
D)  moderately lowers; does not change

Question 17

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 18

The risk that interest payments will not be made,or that the face value of a bond is not repaid when a bond matures is

Accepted Answer

A)  interest rate risk.
B)  inflation risk.
C)  moral hazard.
D)  default risk.

Question 19

A plot of the interest rates on default-free government bonds with different terms to maturity is called

Accepted Answer

A)  a risk-structure curve.
B)  a default-free curve.
C)  a yield curve.
D)  an interest-rate curve. C

Question 20

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

Exam 6: The Risk and Term Structure of Interest Rates

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following securities has the lowest interest rate?

Correct AnswerverifiedShow Answer

According to the liquidity premium theory of the term structure

Correct AnswerverifiedShow Answer

If a corporation begins to suffer large losses,then the default risk on the corporate bond will

Correct AnswerverifiedA

Everything else held constant,an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds,and ________ the demand for U.S.government bonds.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S.Treasury bonds.This is due to

Correct AnswerverifiedShow Answer

When yield curves are steeply upward sloping,

Correct AnswerverifiedShow Answer

Three factors explain the risk structure of interest rates:

Correct AnswerverifiedShow Answer

According to the expectations theory of the term structure,the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

According to the segmented markets theory of the term structure

Correct AnswerverifiedShow Answer

Use the following figure to answer the questions : -The steeply upward sloping yield curve in the figure above indicates that

Correct AnswerverifiedA

An inverted yield curve predicts that short-term interest rates

Correct AnswerverifiedShow Answer

An increase in default risk on corporate bonds ________ the demand for these bonds,but ________ the demand for default-free bonds,everything else held constant.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The risk that interest payments will not be made,or that the face value of a bond is not repaid when a bond matures is

Correct AnswerverifiedShow Answer

A plot of the interest rates on default-free government bonds with different terms to maturity is called

Correct AnswerverifiedC

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

Correct AnswerverifiedShow Answer

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A

Everything else held constant,an increase in marginal tax rates would likely have the effect of the demand for municipal bonds,and the demand for U.S.government bonds.

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A

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An increase in default risk on corporate bonds the demand for these bonds,but the demand for default-free bonds,everything else held constant.

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

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C

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