Money and Banking: Module 4 - Chapter 4
The rate at which a lender needs to be compensated for taking on greater risk is known as a(n) __________ premium.
default risk
As the federal marginal tax rate rises, the advantage of municipal bonds over corporate bonds
increases
According to the pure expectations theory, a flat yield curve means the market
thinks that future interest rates will be exactly the same as current interest rates.
Diedre works for a pension fund and is thinking of buying some bonds that have a nominal interest rate of 6%. She believes that the inflation rate over the life of the bond will be 2%. The ex-post real interest rate on this bond is
unknown
Armand buys a 10-year, $10,000 bond that pays him $500 every year for 10 years and repays the face value in year 10. During the 10-year period, the rate of inflation holds steady at 3% per year. The real rate of return on Armand's investment is
2%.
Daniella is considering the purchase of a 10-year, $10,000 bond being issued by Disreputable, Inc. The bond offers an interest rate of 5.5%. The rate on a similar US Treasury bond is 2.5%. All else equal, Daniella will be getting a default premium of _____, if she purchases the Disreputable, Inc. bond.
3.0%
Julia is in the 10% marginal income tax bracket and earned a 4.5% return on the municipal bonds that just matured. The nominal interest rate paid on these bonds was
4.5%.
Consider Figure 4-1, which shows the supply and demand for US Treasury Securities (S US and D US ) and for Charter Corp. bonds (S C and D C ), as well as the corresponding equilibrium price (P US and P C ). What is the most likely reason that the market price for US Treasury Securities is higher than the market price for Charter Corp. bonds?
There is a higher risk that Charter Corp. will default on its obligation.
Harper just got a big raise at work, which pushed her from the 15% federal marginal tax bracket to the 25% marginal tax bracket. Which of the following best describes how this might affect her decision to buy municipal bonds?
This will make her more likely to buy municipal bonds because it will increase the difference between the nominal interest rate paid on the bonds and the after-tax interest rate she will receive relative to corporate bonds.
The best way to measure the default risk premium that a borrower is paying is to
compare the interest rate the borrower pays with the risk-free premium, usually represented by the rate on US Treasury Securities.
A major advantage that municipal bonds have over corporate bonds for investors is that
the income earned on municipal bonds is not subject to federal income tax.
The three theories that economists have developed to explain the shape of the yield curve are
the pure expectations theory, the term premium theory, and the segmented market theory.
Inflation is a benefit to
borrowers
The risk that a bond issuer will not be able to live up to the promise they make when they issue a bond is known as __________ risk.
default
