Chapter 6**

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 _____. right; left left; left left; right right; right

right; left

Differences in _____ explain why interest rates on Treasury securities are not all the same. risk liquidity time to maturity tax characteristics

time to maturity

If 1-year interest rates for the next 5 years are expected to be 4%, 2%, 5%, 4%, and 5%, and the 5-year term premium is 1%, then the 5-year bond rate will be: 2% 3% 4% 5%

5%

If the expected path of 1-year interest rates over the next 5 years is 4%, 5%, 7%, 8%, and 6%, then the expecations theory predicts that today's interest rate on the 5-year bond is: 4% 5% 6% 7%

6%

The segmented markets theory can explain: Why yield curves tend to slope upward when short-term interest rates are low and to be inverted when short-term interest tes are high. Why interest rates on bonds of different maturities tend to move together. Why yield curves have been used to forecast business cycles. Why yield curves usually tend to slope upward.

Why yield curves usually tend to slope upward.

A plot of the interest rates on default-free government bonds with different terms to maturity is called: a yield curve an intererst-rate curve a risk-structure curve a default-free curve

a yield curve

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. average sum multiple difference

average

According the liquidity premium theory of the term structure, a flat yield curve indicates that short-term interest rates are expected to: rise in the future remain unchanged in the future decline moderately in the future decline sharply in the future

decline moderately in the future

Risk premiums on corporate bonds tend to _____ during business cycle expansions and _____ during recessions, everything else held constant. increase; decrease increase; increase decrease; decrease decrease; increase

decrease; increase

Three factors explain the risk structure of interest rates: maturity, liquidity, and the income tax treatment of a security. maturity, default risk, and the liquidity of a security. maturity, default risk, and the income tax treatment of a security. liquidity, default risk, and the income tax treatment of a security.

liquidity, default risk, and the income tax treatment of a security.

When yield curves are steeply upward sloping: short-term interest rates are about the same as long-term interest rates. short-term interest rates are above long-term interest rates. medium-term interest rates are above both short-term and long-term interest rates. long-term interest rates are above short-term interest rates.

long-term interest rates are above short-term interest rates.

A bond with default risk will always have a _____ risk premium. An increase in its default risk will _____ the risk premium. negative; lower negative; raise positive; lower positive; raise

positive; raise

In actual practice, short-term interest rates and long-term interest rates usually move together. This is the major shortcoming of the: segmented markets theory liquidity premium theory separable markets theory expectations theory

segemented markets theory

The additional incentive that the purchaser of a Treasury security requires to buy a long-term security rather than a short-term security is called the: risk premium market premium term premium tax premium

term premium

According to the segmented markets theory of the term structure: because of the positive term premium, the yield curve will not be observed to be downward-sloping. investors' strong preference for short-term relative to long-term bonds explains why yield curves typically slope downward. the interest rate for each maturity bond is determined by supply and demand for that maturity bond. bonds of one maturity are close substitutes for bonds of other maturities, therefore, interest rates on bonds of different maturities move together over titme.

the interest rate for each maturity bond is determined by supply and demand for that maturity bond.

Other things being equal, a decrease in liquidity of corporate bonds shifts the demand curve for corporate bonds to the _____ and the demand curve for Treasury bonds shifts to the _____. right; right right; left left; left left; right

left; right

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

1 year

According to the liquidity premium theory of the term structure: bonds of different maturities are not substitutes. interest rates on bonds of different maturities do not move together over time. 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. yield curves should never slope downward.

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.

According the expectations theory of the term structure: buyers require an additional incentive to hold long-term bonds. buyers of bonds prefer short-term to long-term bonds. 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. interest rates on bonds of different maturities move together over time.

interest rates on bonds of different maturities move together over time.

The risk structure of interest rates is: the structure of how interest rates move over time. the relationship among the term to maturity of different bonds. the relationship among interest rates on bonds with different maturities. the relationship among interest rates of different bonds with the same maturity.

the relationship among interest rates of different bonds with the same maturity.