M&B ( Chapter 6)

Which of the following bonds are considered to be default-risk free? A) junk bonds B) U.S. Treasury bonds C) municipal bonds D) investment-grade bonds

B) U.S. Treasury bonds

The typical shape for a yield curve is A) bowl shaped B) mound shaped C) gently upward sloping D) flat

C) gently upward sloping

When the yield curve is flat or downward-sloping, it suggests that the economy is more likely to enter A) a recession B) a boom time C) an expansion D) a period of increasing output

A) a recession

A bond with default risk always have a ________ risk premium and an increase in its default risk will ______ the risk premium. A) positive; raise B) negative; raise C) positive; lower D) negative; lower

A) positive; raise

In actual practice, short-term interest rates and long-term interest rates usually move together; this is the major shortcoming of the A) segmented markets theory B) expectations theory C) separable markets theory D) liquidity premium theory

A) segmented markets theory

Everything else held constant, if the tax-exempt status of municipal bonds were eliminated, then A) the interest rate on municipal bonds would exceed the rate on Treasury bonds B) the interest rates on municipal bonds would still be less than the interest rate on Treasury bonds C) the interest rates on municipal, Treasury, and corporate bonds would all increase. D) the interest rate on municipal bonds would equal the rate on Treasury bonds

A) the interest rate on municipal bonds would exceed the rate on Treasury bonds

The segmented markets theory can explain A) why yield curves usually tend to slope upward B) 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 C) why yield curves have been used to forecast business cycles D) why interest rates on bonds of different maturities tend to move together

A) why yield curves usually tend to slope upward

An inverted yield curve predicts that short-term interest rates A) will fall in the future B) are expected to rise in the future C) will remain unchanged in the future D) will rise and then fall in the future

A) will fall in the future

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 A) risk premium B) tax premium C) term premium D) market premium

C) term premium

Which of the following statements is TRUE? A) The demand for a bond declines when it becomes less liquid, decreasing the interest rate spread between it and relatively more liquid bonds. B) A liquid asset is one that can be quickly and cheaply converted into cash C) The corporate bond market is the most liquid bond market D) The differences in bond interest rates reflect differences in default risk only.

B) A liquid asset is one that can be quickly and cheaply converted into cash

A plot of the interest rates on default-free government bonds with different terms to maturity os called A) an interest-rate curve B) a yield curve C) a default-free curve D) a risk-structure curve

B) a yield curve

Risk premiums on corporate bonds tend to ___________ during business cycle expansions and ___________ during recessions, everything else held constant. A) increase; decrease B) decrease; increase C) increase; increase D) decrease; decrease

B) decrease; increase

A decrease in the liquidity of corporate bonds, other things being equal, shifts the demand curve for corporate bonds to the __________ and the demand curve for Treasury bonds shifts to the __________. A) left; left B) left; right C) right; left D) right; right

B) left; right

Other things being equal, an increase 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 ________. A) left; left B) left; right C) right; left D) right; right

B) left; right

An increase in the riskiness of corporate bonds will ______ the price of corporate bonds and _________ the price of Treasury bonds, everything else held constant. A) reduce; reduce B) reduce; increase C) increase; reduce D) increase; increase

B) reduce; increase

According to the liquidity premium theory of the term structure, a slightly upward sloping yield curve indicates that short-term interest rates are expected to A) decline sharply in the future B) remain unchanged in the future C) rise in the future D) decline moderately in the future

B) remain unchanged in the future

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 A) decline moderately on the future B) rise in the future C) decline sharply in the future D) remain unchanged in the future

B) rise in the future

The spread between the interest rates on bonds with default risk and default-free is called the A) junk margin B) risk premium C) bond margin D) default premium

B) risk premium

The term structure of interest rates is A) the structure of how interest rates move over time B) the relationship among interest rates on bonds with different maturities. C) the relationship among interest rates of different bonds with the same maturity D) the relationship among the term to maturity of different bonds

B) the relationship among interest rates on bonds with different maturities

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 A) 4 percent B) 5 percent C) 6 percent D) 7 percent

C) 6 percent

Which of the following statements are TRUE? A) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. B) As their relative riskiness increases, the expected return on corporate bonds increases relative to the expected return on default-free bonds. C) The expected return on corporate bonds decreases as default risk increases. D) A corporate bond's return becomes less uncertain as default risk increases.

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

A key assumption in the segmented markets theory is that bonds of different maturities A) are substitutes but not perfect substitutes B) are substitutes only if the investor is given a premium incentive C) are not substitutes at all D) are perfect substitutes

C) are not substitutes at all

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

C) decline moderately in the future

An increase in the riskiness of corporate bonds will ______ the yield on corporate bonds and ___________ the yield on Treasury securities, everything else held constant. A) reduce; increase B) increase; increase C) increase; reduce D) reduce; reduce

C) increase; reduce

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 A) separable markets theory B) segmented markets theory C) liquidity premium theory D) expectations theory

C) liquidity premium theory

The risk structure of interest rates is A) the structure of how interest rates move over time B) the relationship among the term to maturity of different bonds C) the relationship among interest rates of different bonds with the same maturity.

C) the relationship among interest rates of different bonds with the same maturity

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 A) 2 percent. B) 3 percent. C) 4 percent. D) 5 percent.

D) 5 percent

According to the liquidity premium theory of the term structure, a downward sloping yield curve indicates that short-term interest rates are expected to A) decline moderately in the future B) rise in the future C) remain unchanged in the future D) decline sharply in the future

D) decline sharply in the future

If bonds with different maturities are perfect substitutes, then the ___________ on these bonds must be equal A) excess return B) surprise return C) surplus return D) expected return

D) expected return

The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and are __________ U.S. Treasury bonds. A) less speculative than B) tax-exempt unlike C) lower-yielding than D) less liquid than

D) less liquid than

Three factors explain the risk structure of interest rates A) maturity, default risk, and the income tax treatment of a security B) maturity, default risk, and the liquidity of a security C) maturity, liquidity, and the income tax treatment of a security D) liquidity, default risk, and the income treatment of a security

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

According to the segmented markets theory of the term structure A) investors' strong preferences for short-term relative to long-term bonds explains why yield curves typically slope downward B) bonds of one maturity are close substitutes for bonds of other maturities, therefore, interest rates on bonds of different maturities move together over time 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

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

According to the liquidity premium theory of the term structure 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) because of the positive term premium, the yield curve will not be observed to be downward sloping C) the interest rate for each maturity bond is determined by supply and demand for that maturity bond D) 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

D) 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

According to the expectations theory of the term structure A) investors have strong preferences for short-term relative to long-term bonds, explaining why yield curves typically slope upward B) when the yield curve is steeply upward sloping, short-term interest rates are expected to remain relatively stable in the future C) when the yield curve is downward sloping, short-term interest rates are expected to remain relatively stable in the future D) yield curves should be equally likely to slope downward as slope upward

D) yield curves should be equally likely to slope downward as slope upward