M&B Ch. 6

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 liquidity risk. default risk. inflation risk. interest rate risk.

default risk.

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 ________. right; right right; left left; right left; left

left; right

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. separable markets theory expectations theory segmented markets theory liquidity premium theory

liquidity premium theory

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 one year. two years. three years. four years.

one year.

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 right; right left; right

right; left

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

right; left

According to the liquidity premium theory of the term structure, a steeply upward sloping 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

rise in the future.

The spread between the interest rates on bonds with default risk and default-free bonds is called the junk margin. bond margin. default premium. risk premium.

risk premium.

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 4 percent. 5 percent. 6 percent. 7 percent.

6 percent.

Which of the following long-term bonds has the highest interest rate? corporate Aaa bonds municipal bonds corporate Baa bonds U.S. Treasury bonds

corporate Baa bonds

If the probability of a bond default increases because corporations begin to suffer large losses, then the default risk on corporate bonds will ________ and the expected return on these bonds will ________, everything else held constant. increase; decrease decrease; increase increase; increase decrease; decrease

increase; decrease

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

increase; decrease; increase

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

increases; less

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. bonds of one maturity are close substitutes for bonds of other maturities, therefore, interest rates on bonds of different maturities move together over time. the interest rate for each maturity bond is determined by supply and demand for that maturity bond. investors' strong preferences 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.

The expectations theory and the segmented markets theory do not explain the facts very well, but they provide the groundwork for the most widely accepted theory of the term structure of interest rates the asset market approach. the separable markets theory. the liquidity premium theory. the Keynesian theory.

the liquidity premium theory.

According to the liquidity premium theory of the term structure, a downward sloping 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 sharply in the future.

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

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

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

why yield curves usually tend to slope upward.