Chapter 5 How Do Risk and Term Structure Affect Interest Rates?
13) According to the expectations theory of the term structure, A) the interest rate on long-term bonds will exceed the average of expected future short-terminterest rates. B) interest rates on bonds of different maturities move together over time. C) buyers of bonds prefer short-term to long-term bonds. D) all of the above. E) only A and B of the above.
B
10) (I) If a corporate bond becomes less liquid, the demand for the bond will fall, causing theinterest rate to rise.(II) If a corporate bond becomes less liquid, the demand for Treasury bonds does not change. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
A
3) Which of the following long-term bonds should have the highest interest rate? A) Corporate Baa bonds B) U.S. Treasury bonds C) Corporate Aaa bonds D) Municipal bonds
A
16) 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 onbonds of different maturities do not move together over time. B) the interest rate on long-term bonds will equal an average of short-term interest rates thatpeople expect to occur over the life of the long-term bonds plus a term premium. C) because of the positive term premium, the yield curve cannot be downward-sloping. D) all of the above. E) only A and B of the above
B
18) A bond rating of Aa or AA would mean that the quality of the bond is A) the highest. B) high. C) medium grade. D) speculative.
B
2) The risk structure of interest rates is A) the structure of how interest rates move over time. B) the relationship among interest rates of different bonds with the same maturity. C) the relationship among the terms to maturity of different bonds. D) the relationship among interest rates on bonds with different maturities
B
5) (I) If a corporation suffers big losses, the demand for its bonds will rise because of thehigher interest rates the firm must pay.(II) The spread between the interest rates on bonds with default risk and default-free bonds iscalled the risk premium. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.
B
7) When the default risk on corporate bonds decreases, other things equal, the demand curvefor corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts tothe ________. A) right; right B) right; left C) left; left D) left; right
B
8) As a result of the subprime collapse, the demand for low -quality corporate bonds________, the demand for high-quality Treasury bonds ________, and the risk spread________. A) increased; decreased; was unchanged B) decreased; increased; increased C) increased; decreased; decreased D) decreased; increased; was unchanged
B
9) If Moody's or Standard and Poor's downgrades its rating on a corporate bond, the demandfor the bond ________ and its yield ________. A) increases; decreases B) decreases; increases C) increases; increases D) decreases; decreases
B
19) If a bond has a favorable tax treatment, its required interest rate (all else equal) A) will be higher. B) will not be affected. C) will be lower. D) all of the above could happen.
C
4) Bonds with relatively low risk of default are called A) zero coupon bonds. B) junk bonds. C) investment-grade bonds. D) none of the above.
C
6) Holding everything else the same, if a corporation's earnings rise, then the default risk onits bonds will ________ and the expected return on those bonds will ________. A) increase; decrease B) decrease; decrease C) increase; increase D) decrease; increase
D
1) The term structure of interest rates is A) the relationship among interest rates of different bonds with the same risk and maturity. B) the structure of how interest rates move over time. C) the relationship among the terms to maturity of different bonds from different issuers. D) the relationship among interest rates on bonds with different maturities but similar risk.
D
11) Which of the following statements are true? A) Because coupon payments on municipal bonds are exempt from federal income tax, theexpected after-tax return on them will be higher for individuals in higher income tax brackets. B) An increase in tax rates will increase the demand for municipal bonds, lowering theirinterest rates. C) Interest rates on municipal bonds will be lower than on comparable bonds without the taxexemption. D) All of the above are true statements. E) Only A and B are true statements.
D
12) Yield curves can be classified as A) upward-sloping. B) downward-sloping. C) flat. D) all of the above. E) only A and B of the above.
D
15) According to the market segmentation theory of the term structure, A) the interest rate for bonds of one maturity is determined by the supply and demand forbonds of that maturity. B) bonds of one maturity are not substitutes for bonds of other maturities; therefore, interestrates on bonds of different maturities do not move together over time. C) investors' strong preference for short-term relative to long-term bonds explains why yieldcurves typically slope upward. D) all of the above. E) none of the above.
D
14) If the expected path of one-year interest rates over the next five years is 1 percent, 2percent, 3 percent, 4 percent, and 5 percent, then the pure expectations theory predicts thatthe bond with the highest interest rate today is the one with a maturity of A) one year. B) two years. C) three years. D) four years. E) five years.
E
17) Since yield curves are usually upward sloping, the ________ indicates that, on average,people tend to prefer holding short-term bonds to long-term bonds. A) market segmentation theory B) expectations theory C) liquidity premium theory D) both A and B of the above E) both A and C of the above
E
