econ

According to the liquidity premium theory

1) a downward sloping yield curve indicates that short-term interest rates are expected to fall sharply in the future.

According to the expectations theory of the term structure

2) 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.

When yield curves are flat,

3) short-term interest rates are about the same as long-term interest rates.

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

4) 2 percent.

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

4) 4 percent

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

4) Corporate Baa bonds

According to the expectations theory of the term structure

3) buyers of bonds prefer short-term to long-term bonds. NOT OPTION 3 4) all of the above. ANSWER 5) only A and B of the above.

If the yield curve has a mild upward slope, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting

3) constant short-term interest rates in the near future and further out in the future.

A particularly attractive feature of the ________ is that it tells you what the market is predicting about future short-term interest rates by just looking at the slope of the yield curve.

3) expectations theory

According to the segmented markets theory of the term structure

3) interest rates on bonds of different maturities do not move together over time.

According to the expectations theory of the term structure 5151

3) interest rates on bonds of different maturities move together over time. NOT OPTION 3 ANSWER 4) all of the above. 5) only A and B of the above.

According to the expectations theory of the term structure 5050

3) investors have strong preferences for short-term relative to long-term bonds, explaining why yield curvestypically slope upward. NOT NUMBER 3 4) all of the above. ANSWER 5) only A and B of the above.

True or false? According to the expectations theory of term structure, the expected return of the three-year bond should be equal to the expected return from buying three one-year bonds today.

False

According to the expectations theory of the term structure 0909

3) buyers of bonds do not prefer bonds of one maturity over another. NOT OPTION 3 ANSWER 4) all of the above. 5) only A and B of the above.

If the yield curve is flat for short maturities and then slopes downward for longer maturities, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting.

1) a decline in short-term interest rates in the near future and an even steeper decline further out in the future.

A decrease in marginal tax rates would likely have the effect of ________ the demand for municipal bonds, and________ the demand for U.S. government bonds.

1) decreasing; increasing

The interest rate on municipal bonds falls relative to the interest rate on Treasury securities when

1) income tax rates are raised.

According to the expectations theory of the term structure

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

When yield curves are steeply upward sloping,

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

According to the liquidity premium theory of the term structure, a steeply upward sloping yield curve indicates that

1) short-term interest rates are expected to rise in the future.

Municipal bonds have default risk, yet their interest rates are lower than the rates on default-free Treasury bonds. This suggests that

1) the benefit from the tax-exempt status of municipal bonds exceeds their default risk.

The risk premium on corporate bonds becomes smaller if

1) the liquidity of corporate bonds increases.

Which of the following statements are true?

2) A corporate bond's return becomes more uncertain as default risk increases.

Which of the following statements are true?

2) As their relative riskiness increases, the expected return on corporate bonds decreases relative to theexpected return on default-free bonds.

The risk premium on corporate bonds rises when

2) a flurry of major corporate bankruptcies occurs.

According to the liquidity premium theory of the term structure, a slightly upward sloping yield curve indicates that

2) short-term interest rates are expected to remain unchanged in the future.

If the tax-exempt status of municipal bonds were eliminated, then

2) the interest rate on municipal bonds would exceed the rate on Treasury bonds.

Which of the following statements are true?

3) A liquid asset is one that can be quickly and cheaply converted into cash. NOT OPTION 3 ANSWER 4) All of the above are true statements. 5) Only A and B are true statements.

If the yield curve slope is flat, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting

3) a mild decline in short-term interest rates in the near future and a continuing mild decline further out in the future.

According to the segmented markets theory of the term structure

3) investors' strong preferences for short-term relative to long-term bonds explains why yield curves typically slope downward. NOT OPTION 3 4) only A and B of the above.

According to the liquidity premium theory of the term structure, a flat yield curve indicates that

3) short-term interest rates are expected to decline moderately in the future.

The steeply upward sloping yield curve in Figure 6-1 indicates that:

3) short-term interest rates are expected to rise in the future.

The inverted U-shaped yield curve in Figure 6-3 indicates that

3) short-term interest rates are expected to rise in the near-term and fall later on.

According to the segmented markets theory of the term structure

3) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. NOT OPTION 3 ANSWER 4) all of the above. 5) none of the above.

According to the segmented markets theory of the term structure

3) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. NOT OPTION 3 4) all of the above.

According to the expectations theory of the term structure

3) 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. NOT OPTION 3 ANSWER 4) all of the above. 5)

During a "flight to quality"

3) the spread between Aaa and Baa bonds increases.

According to the expectations theory of the term structure

3) when the yield curve is steeply upward sloping, short-term interest rates are expected to rise in the future. NOT NUMBER 3 ANSWER 4) all of the above. 5) only A and B of the above.

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

4) 4 percent.

If 1-year interest rates for the next two years are expected to be 4 and 2 percent, and the 2-year term premium is1 percent, than the 2-year bond rate will be

4) 4 percent.

Which of the following statements are true?

4) The expected return on corporate bonds decreases as default risk increases.

If income tax rates were lowered, then

4) both A and B would occur.

Of the following long-term bonds, the one with the highest interest rate is

4) corporate Caa bonds.

The U-shaped yield curve in Figure 6-2 indicates that short-term interest rates are expected to ________.

4) fall sharply in the near-term and rise later on

When yield curves are downward sloping,

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

According to the liquidity premium theory of the term structure, a downward sloping yield curve indicates that

4) short-term interest rates are expected to decline sharply in the future.

When the yield curve slopes down,

4) the expectations theory suggests that short-term interest rates are expected to fall.

When the yield curve is upward sloping,

4) the expectations theory suggests that short-term interest rates are expected to rise.

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

4) widened significantly during the Great Depression.

If the expected path of 1-year interest rates over the next four years is 5 percent, 4 percent, 2 percent, and 1 percent, then the expectations theory predicts that today's interest rate on the four-year bond is

5) 3 percent.

If 1-year interest rates for the next five years are expected to be 4, 2, 5, 4, and 5 percent, and the 5-year term premium is 1 percent, than the 5-year bond rate will be

5) 5 percent.

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 0404

5) 6 percent.

True or false? According to the segmented market theory of term structure, yield curves should be as equally likely to slope downward as slope upward.

False

True or false? The expectations theory cannot explain the fact that yield curves usually slope upward because it implies that there is no relationship between long-term and short-term interest rates.

False

True or false? The liquidity premium theory of the term structure indicates that today's long-term interest rate equals the average of short-term interest rates that people expect to occur over the life of the long-term bond.

False

True or False? According to the segmented markets theory of the term structure, bonds of one maturity are not substitutes for bonds of other maturities, and therefore, interest rates on bonds of different maturities do not move together over time.

True

True or false? According to the expectations theory of term structure, buyers of bonds do not prefer bonds of one maturity over another.

True

True or false? According to the expectations theory of term structure, yield curves should be as equally likely to slope downward as slope upward.

True

True or false? According to the liquidity premium theory of term structure, buyers of bonds prefer short-term to long-term bonds.

True