ECON 2035 Ch. 4.4-Ch.5
What is the most important contrast between the segmented markets theory and the expectations theory? A) The expectation theory states that investors view similar assets that differ only with respect to maturity as perfect substitutes. B) The segmented markets theory states that investors view similar assets that differ only with respect to maturity as perfect substitutes. C) The expectations theory does a better job of explaining why yield curves typically are upward-sloping. D) The segmented markets theory does a better job of explaining why yields on instruments of different maturities tend to move together.
The expectation theory states that investors view similar assets that differ only with respect to maturity as perfect substitutes.
Currently, a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%. What is the risk premium of the typical A-rated ten-year corporate bond with a yield of 5.5%? A) 0.5% B) 0.8% C) 1.17% D) 5.5%
0.8%
Currently, a three-year Treasury note pays 4.75%. Assuming that your tax rate is 20%, what is the minimum interest rate that you would you need to earn on a tax-free municipal bond in order to buy it instead? A) 0.95% B) 3.8% C) 5.7% D) 15.25%
3.8%
A one-year bond currently pays 5% interest. It's expected that it will pay 4.5% next year and 4% the following year. The two-year term premium is 0.2% while the three-year term premium is 0.35%. What is the interest rate on a three-year bond according to the liquidity premium theory? A) 4.5% B) 4.68% C) 4.85% D) 5.05%
4.85%
A one-year bond currently pays 5% interest. It's expected that it will pay 4.5% next year and 4% the following year. The two-year term premium is 0.2% while the three-year term premium is 0.35%. What is the interest rate on a two-year bond according to the liquidity premium theory? A) 4.5% B) 4.75% C) 4.95% D) 4.975%
4.95%
Suppose that your marginal federal income tax rate is 30%, the sum of your marginal state and local tax rates is 5%, and the yield on a thirty-year corporate bond is 10%. You would be indifferent between buying this corporate bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield of A) 6.5%. B) 7.0%. C) 9.5%. D) 10.0%.
6.5%.
Suppose that your marginal federal income tax rate is 30%, the sum of your marginal state and local tax rates is 5%, and the yield on thirty-year U.S. Treasury bonds is 10%. You would be indifferent between buying a thirty-year Treasury bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield of A) 6.5%. B) 7.0%. C) 9.5%. D) 10.0%.
7.0%.
Which of the following is the highest bond rating assigned by Moody's Investors Service? A) Aaa B) A C) B D) Baa
Aaa
Which of the following bond ratings by Moody's Investors Service would NOT be considered to be below investment grade? A) Baa B) Ba C) B D) All of these ratings are considered below investment grade.
Baa
Which of the following is the lowest rating given to an investment-grade bond by Moody's? A) Aa B) A C) Baa D) B
Baa
Which of the following statements about junk bonds is FALSE? A) Given the likelihood of default, it is never profitable to purchase junk bonds. B) They pay higher interest rates than investment grade bonds due to higher perceived risk. C) Prior to the 1970s, corporations were unable to issue junk bonds. D) In October 2016, the average yield on junk bonds was more than twice the average yield on investment grade bonds.
Given the likelihood of default, it is never profitable to purchase junk bonds.
Which of the following accurately describes the tax treatment of municipal bonds? A) All income from municipal bonds is tax free. B) Interest is tax free, but unrealized capital gains are taxable. C) Interest is tax free, but realized capital gains are taxable. D) Interest is taxable, but capital gains are tax free.
Interest is tax free, but realized capital gains are taxable.
Which of the following is TRUE of the segmented markets theory? A) It assumes that borrowers have particular periods for which they want to borrow. B) It assumes that lenders always lend for short periods. C) It provides a good explanation for why yield curves usually slope upward. D) It assumes that instruments with different maturities are perfect substitutes.
It assumes that borrowers have particular periods for which they want to borrow.
How can a global savings glut affect the United States? A) It can reduce the world real interest rate, thus encouraging borrowing by Americans. B) It can increase the world real interest rate, thus encouraging saving by Americans. C) It can reduce the supply of loanable funds for the United States. D) It can reduce the demand for loanable funds for the United States.
It can reduce the world real interest rate, thus encouraging borrowing by Americans.
Which of the following statements about junk (high-risk) bonds is TRUE? A) They never outperform treasury bonds since they're too risky. B) The price of junk bonds increases as their perceived risk increases. C) They tend to perform best during recessions. D) One can profit by owning them if market perceptions of their risk decline.
One can profit by owning them if market perceptions of their risk decline.
Which of the following is NOT a reason that credit ratings agencies became more relevant beginning in the late 1970s? A) The number of bond defaults rose due to periods of recession and inflation. B) Rating agencies began to charge investors for their services. C) Governments began to include bond ratings in their regulation of banks, mutual funds, and other financial firms. D) Rating agencies began to rate bonds issued by foreign governments and firms.
Rating agencies began to charge investors for their services.
Which of the following assigns widely-followed bond ratings? A) Standard & Poor's Corporation B) Securities and Exchange Commission C) Federal Reserve D) IBM
Standard & Poor's Corporation
Which of the following statements is TRUE? A) The more liquid the bond, the lower the yield. B) Tax-free bonds normally have a higher interest rate than other types of bonds. C) The price of a bond increases as it becomes more risky. D) The yield curve illustrates the relative default risks of alternative types of bonds.
The more liquid the bond, the lower the yield.
Which of the following statements is correct? A) The supply curve for loanable funds slopes up, whereas the supply curve for bonds slopes down. B) The demand curve for loanable funds slopes up, whereas the demand curve for bonds slopes down. C) The demand curve for loanable funds and the demand curve for bonds both slope up. D) The supply curve for bonds and the supply curve for loanable funds both slope up.
The supply curve for bonds and the supply curve for loanable funds both slope up.
Which of the following is NOT true of the yield curve for U.S. Treasury securities? A) Typically, it slopes upward. B) It depicts the relationship among yields on securities of different maturities. C) Typically, it shifts up or down rather than twists. D) Typically, it slopes downward.
Typically, it slopes downward.
The term structure is usually defined with yields on which securities? A) corporate bonds B) commercial paper C) U.S. Treasury securities D) municipal bonds
U.S. Treasury securities
Which of the following will cause the money demand curve to shift to the left? A) a decrease in real GDP B) an increase in the price level C) a decrease in the nominal interest rate D) an increase in the supply of money
a decrease in real GDP
The demand curve for loanable funds slopes down because A) at lower bond prices more loanable funds will be supplied. B) lower interest rates reduce the inflation rate. C) an increase in the interest rate makes borrowers more willing and able to demand more funds. D) a decrease in the interest rate makes borrowers more willing and able to demand more funds.
a decrease in the interest rate makes borrowers more willing and able to demand more funds.
Which of the following is considered a default-risk-free instrument? A) a three-month commercial paper issued by GE B) a share of stock issued by Google C) a three-month Treasury bill D) a ten-year bond issued by Intel
a three-month Treasury bill
Some claim that ratings agencies have a conflict of interest since A) they rate the quality of their own bonds. B) agencies charge firms for their services rather than investors, they have an incentive to give high ratings to gain business. C) government began to include bond ratings as part of regulations of mutual funds, banks, and financial firms. D) they issued many of the mortgages that were later securitized into bonds.
agencies charge firms for their services rather than investors, they have an incentive to give high ratings to gain business.
Loanable funds refers to A) only those funds loaned from one bank to another. B) only those funds loaned to banks by the Federal Reserve. C) only those funds loaned by banks to private individuals. D) all those funds changing hands between lenders and borrowers in the bond market.
all those funds changing hands between lenders and borrowers in the bond market.
In a large open economy A) domestic lending and borrowing decisions have no impact on the world real interest rate. B) an increase in the domestic supply of loanable funds would lower the world real interest rate. C) the domestic equilibrium real interest rate is determined independently of foreign borrowing and lending. D) an increase in the domestic demand for loanable funds would lower the world real interest rate.
an increase in the domestic supply of loanable funds would lower the world real interest rate.
The supply curve of loanable funds slopes up because A) at higher bond prices more loanable funds will be supplied. B) higher interest rates reduce the inflation rate. C) an increase in the interest rate makes lenders more willing and able to supply more funds. D) a decrease in the interest rate makes lenders more willing and able to supply more funds.
an increase in the interest rate makes lenders more willing and able to supply more funds.
Which of the following will cause the money demand curve to shift to the right? A) a decrease in real GDP B) an increase in the price level C) an increase in the nominal interest rate D) a decrease in the supply of money
an increase in the price level
Since Germany is a large open economy, the increase in German borrowing and investment in what was formerly East Germany in the early 1990s resulted in A) a decline in the world real interest rate. B) a shift to the right in the German supply of loanable funds curve. C) an increase in the real interest rate in the United States. D) a shift to the left in the German demand for loanable funds curve.
an increase in the real interest rate in the United States.
A company that retains a high bond rating during a recession in which many other companies see their bond ratings cut will experience A) an increased flow of funds into the market for its securities. B) an increased demand for its securities, resulting in a higher expected return. C) a decreased demand for its securities, resulting in a lower expected return. D) a decreased flow of funds into the market for its securities.
an increased flow of funds into the market for its securities.
U.S. Treasury securities A) are considered risk free because their prices never change. B) have been defaulted on several time in U.S. history. C) are considered default-risk-free instruments. D) have a large default risk premium.
are considered default-risk-free instruments.
Bond ratings A) are published annually by the federal government and are based largely on information contained in corporate tax returns. B) are published annually by the federal government and are based on publicly available information. C) are published monthly by the federal government and are based on publicly available information. D) are published by private bond-rating agencies.
are published by private bond-rating agencies.
The default risk premium fluctuates mainly A) because bond rating agencies tend to be inconsistent in their ratings of bonds. B) because risk-neutral investors will often become risk-averse as time passes. C) because taxes tend to rise over the long run. D) as new information about a borrower's creditworthiness becomes available.
as new information about a borrower's creditworthiness becomes available.
The default risk premium is measured A) by an index published monthly by the Securities and Exchange Commission. B) by an index published monthly by The Wall Street Journal. C) as the difference between the yield on a non-Treasury security and the yield on a U.S. Treasury security of the same maturity. D) as the difference between the nominal yield on the security and the real after-tax yield on the security.
as the difference between the yield on a non-Treasury security and the yield on a U.S. Treasury security of the same maturity.
Which of the following is a single statistic that summarizes a rating agency's view of the issuer's likely ability to make the required payments on its bonds? A) grade B) bond rating C) speculation D) yield
bond rating
Default risk arises from the fact that A) borrowers differ in their ability to repay in full the principal and interest required by a bond agreement. B) the bond price drops when interest rates rise. C) it is inherently riskier to wait for a capital gain than to receive an immediate interest payment. D) interest rates are far more likely to go up than to go down.
borrowers differ in their ability to repay in full the principal and interest required by a bond agreement.
Municipal bonds are issued A) only by local governments. B) only by state governments. C) by both state and local governments. D) by the federal government, and by state and local governments.
by both state and local governments.
Differences in the taxation of returns A) only affect the yields of illiquid credit market instruments. B) have a negligible effect on the yields of credit market instruments. C) only affect the yields of high-information cost credit market instruments. D) create differences in yields among credit market instruments.
create differences in yields among credit market instruments.
A bond that is generally agreed to have higher default risk will experience all of the following EXCEPT A) declining demand. B) declining supply. C) higher yield. D) lower price.
declining supply.
A DECREASE in real GDP will result in a(n) ________ in the demand for money and cause the nominal interest rate to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase
decrease; decrease
A DECREASE in money supply will result in a(n) ________ in the quantity of money demanded and cause the nominal interest rate to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase
decrease; increase
In 2016, as investors became more concerned with the default risk of bonds issued by the governments of Greece and Portugal relative to the default risk on bonds issued by the governments of Germany, France, and the Netherlands, the price of bonds issued by GREECE and PORTUGAL would have most likely ________ and the yield on those bonds would have most likely ________. A) increased; increased B) increased; decreased C) decreased; increased D) decreased; decreased
decreased; increased
The world real interest rate is A) set annually by a special commission at the United Nations. B) set annually by a special commission at the International Monetary Fund. C) determined in the international capital market. D) determined daily on the New York Stock Exchange.
determined in the international capital market.
Consider an open economy that is a net borrower (like the United States). What would be the impact of a shift to a closed economy? A) domestic interest rates would decline B) domestic savings would decline C) domestic investment would decline D) net borrowing would increase
domestic investment would decline
Which of the following is a possible impact of a global savings glut on a small open economy? A) interest rate would increase B) interest rate would decrease C) domestic savings would increase D) domestic investment would increase
domestic investment would increase
The risk premium of corporate bonds typically increases A) when the average price of corporate bonds increases. B) during a recession. C) when the interest rates on corporate bonds decreases. D) when the risk premium on treasury bonds increases.
during a recession.
The equilibrium real interest rate in Belgium will be A) generally above the world real interest rate. B) generally below the world real interest rate. C) equal to the world real interest rate. D) determined by the equilibrium between desired domestic saving and desired domestic investment.
equal to the world real interest rate.
The demand for bonds is A) equivalent to the demand for loanable funds. B) equivalent to the supply of loanable funds. C) represented by an upward-sloping line when the price of bonds is on the vertical axis and the quantity of bonds demanded is on the horizontal axis. D) represented by a downward-sloping line when the interest rate is on the vertical axis and the quantity of bonds demanded is on the horizontal axis.
equivalent to the supply of loanable funds.
For state residents, interest on most bonds issued by their state government is A) exempt from state and federal income taxes. B) exempt from state, but not from federal, income taxes. C) exempt from federal, but not from state, income taxes. D) subject to both state and federal income taxes.
exempt from state and federal income taxes.
The segmented markets theory A) explains upward-sloping yield curves as resulting from the demand for long-term bonds being high relative to the demand for short-term bonds. B) explains upward-sloping yield curves as resulting from the demand for long-term bonds being low relative to the demand for short-term bonds. C) explains upward-sloping yield curves as resulting from the favorable tax treatment of long-term bonds. D) is unable to account for upward-sloping yield curves.
explains upward-sloping yield curves as resulting from the demand for long-term bonds being low relative to the demand for short-term bonds.
Suppose that savers become less willing to purchase medium-quality corporate bonds. The result will be that the prices of medium-quality corporate bonds will A) fall relative to the price of U.S. Treasury securities, but rise relative to the price of high-quality corporate bonds. B) rise relative to the price of U.S. Treasury securities, but fall relative to the price of high-quality corporate bonds. C) rise relative to the prices of U.S. Treasury securities and high-quality corporate bonds. D) fall relative to the prices of U.S. Treasury securities and high-quality corporate bonds.
fall relative to the prices of U.S. Treasury securities and high-quality corporate bonds.
If the Fed DECREASES the money supply and as a result, households and firms buy fewer short-term financial assets, the prices of those short-term financial assets will ________ and the interest rates on those assets will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall
fall; rise
All of the following are names for bonds receiving low ratings EXCEPT A) junk. B) garbage. C) high yield. D) speculative.
garbage.
If lenders anticipate no changes in liquidity, information costs, and tax differences, the yield on a risky security should be A) greater than that on a safe security and the price of a risky security should also be greater than that of a safe security. B) less than that on a safe security and the price of a risky security should also be less than that of a safe security. C) greater than that on a safe security and the price of a risky security should be lower than that of a safe security. D) less than that on a safe security and the price of a risky security should be greater than that on a safe security.
greater than that on a safe security and the price of a risky security should be lower than that of a safe security.
The segmented markets theory A) has difficulty explaining why yield curves usually slope up. B) has difficulty explaining why yield curves usually slope down. C) has difficulty explaining why yields on instruments of different maturities tend to move together. D) provides a good explanation of why yields on instruments of different maturities tend to move together.
has difficulty explaining why yields on instruments of different maturities tend to move together.
When nominal interest rates on financial assets are high, the opportunity cost of holding money is ________, so the quantity of money demanded by households and firms will be ________. A) high; high B) high; low C) low; high D) low; low
high; low
The supply curve for loanable funds would increase due to a(n) A) increase in wealth. B) increase in expected inflation. C) decrease in the liquidity of bonds relative to other assets. D) increase in the information costs of bonds relative to other assets.
increase in wealth.
An INCREASE in the price level will result in a(n) ________ in the demand for money and cause the nominal interest rate to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase
increase; increase
If a large open economy, like the United States, reduces its budget deficit, what impact would this have on a small open economy? A) higher savings B) increased investment C) increased net savings D) no change in interest rates
increased investment
In 2016, as investors became more concerned with the default risk of bonds issued by the governments of Greece and Portugal relative to the default risk on bonds issued by the governments of Germany, France, and the Netherlands, the price of bonds issued by GERMANY, FRANCE, and the NETHERLANDS would have most likely ________ and the yield on those bonds would have most likely ________. A) increased; increased B) increased; decreased C) decreased; increased D) decreased; decreased
increased; decreased
During the financial crisis of 2007-2009 A) mortgage-backed securities became more liquid. B) information costs of mortgage-backed securities rose. C) information costs of mortgage-backed securities declined. D) the tax treatment of mortgage-backed securities was changed.
information costs of mortgage-backed securities rose.
The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that A) yield curves usually slope upward. B) yield curves usually slope downward. C) instruments with different maturities are perfect substitutes. D) savers are usually risk averse.
instruments with different maturities are perfect substitutes.
Interest and capital gains are taxed differently in the United States in that A) interest is exempt from state and local taxes. B) interest is taxed as ordinary income, but capital gains are taxed only when realized. C) interest is taxed as ordinary income, but capital gains are taxed as accrued. D) capital gains when realized are exempt from state and local taxes.
interest is taxed as ordinary income, but capital gains are taxed only when realized.
Bonds receiving one of the top four ratings are considered A) junk. B) speculative. C) AAA. D) investment grade.
investment grade.
Following the downgrade of U.S. debt by Standard & Poor's in 2011 A) other rating agencies also downgraded U.S. debt. B) interest rates spiked as investor's perception of risk increased. C) investors didn't seem to be any more concerned about default risk than before the downgrade. D) the U.S. implemented a plan to significantly reduce its budget deficit later that year.
investors didn't seem to be any more concerned about default risk than before the downgrade.
Default risk A) is the probability that a borrower will not pay in full the promised coupon or principal. B) exists only for the bonds of small corporations. C) is also known as market risk. D) is zero for bonds issued by cities and states.
is the probability that a borrower will not pay in full the promised coupon or principal.
A small open economy A) is unable to affect the world real interest rate by its borrowing and lending decisions. B) will always be a net borrower from abroad. C) will always be a net lender abroad. D) is almost never able to borrow abroad.
is unable to affect the world real interest rate by its borrowing and lending decisions.
The yield on a thirty-year Treasury bond is 8% at the same time as the yield on two-year Treasury note is 5%. This occurrence A) indicates that the yield curve is downward sloping. B) is well explained by the segmented markets theory. C) is largely explained by the favorable tax treatment of Treasury notes. D) indicates that the bond market is anticipating that inflation will fall.
is well explained by the segmented markets theory.
When a company whose ability to repay its obligations in full is uncertain A) it will have to issue debt with longer maturities than would a company with a lower probability of default. B) its bonds will sell for higher prices than would the bonds of a company with a lower probability of default. C) it must offer investors higher yields to compensate them for the risk they take in buying their bonds or making loans. D) it must do so through financial markets rather than through financial intermediaries.
it must offer investors higher yields to compensate them for the risk they take in buying their bonds or making loans.
An open economy is one that A) has a large government sector. B) lends and borrows in the international capital market. C) produces mainly agricultural goods. D) produces mainly manufactured goods.
lends and borrows in the international capital market.
When nominal interest rates FALL on financial assets such as U.S. Treasury bills, the amount of interest that households and firms A) gain by holding money decreases. B) lose by holding money decreases. C) lose by holding money increases. D) lose or gain by holding money does not change.
lose by holding money decreases.
When nominal interest rates RISE on financial assets such as U.S. Treasury bills, the amount of interest that households and firms A) gain by holding money increases. B) lose by holding money decreases. C) lose by holding money increases. D) lose or gain by holding money does not change.
lose by holding money increases.
A flight to quality refers to a shift by savers from A) bonds and into stocks. B) stocks and into gold or other precious metals. C) bonds and into real assets, such as real estate. D) low-quality bonds and into high-quality bonds.
low-quality bonds and into high-quality bonds
When nominal interest rates on financial assets are low, the opportunity cost of holding money is ________, so the quantity of money demanded by households and firms will be ________.
low; high
In late 2012, President Obama proposed raising the top income tax rate. All of the following are likely impacts of higher income tax rates on bonds EXCEPT A) higher interest rates on Treasury bonds. B) lower interest rates on Municipal bonds. C) increased demand for Municipal bonds. D) lower prices for Municipal bonds.
lower prices for Municipal bonds
The existence of rating agencies has A) lowered returns on corporate bonds. B) raised returns on corporate bonds. C) left returns on corporate bonds largely unaffected. D) raised returns on both corporate bonds and Treasury securities.
lowered returns on corporate bonds.
In an open economy, desired domestic lending A) must equal desired domestic borrowing. B) must equal desired domestic borrowing plus the amount of international lending. C) is always greater than desired domestic borrowing. D) is always less than desired domestic borrowing.
must equal desired domestic borrowing plus the amount of international lending.
A closed economy is one that A) has no government sector. B) neither borrows from nor lends to foreign countries. C) produces mainly agricultural goods. D) produces mainly manufactured goods.
neither borrows from nor lends to foreign countries.
If a small open economy reduces its budget deficit, the result will be A) a lower world real interest rate, but no change in the domestic real interest rate. B) a lower domestic real interest rate, but no change in the world real interest rate. C) lower domestic and world real interest rates. D) no change in either the domestic or world real interest rate.
no change in either the domestic or world real interest rate.
In late 2008, the average risk premium rose because A) investors feared a revival of inflation. B) large tax increases in the United States reduced corporate profits and led to fears of increased defaults. C) of the financial crisis. D) of fraud in the market for municipal bonds.
of the financial crisis.
If the expected path of interest rates on one-year bonds over the next five years is 2%, 4%, 3%, 2%, and 1%, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of A) one year. B) two years. C) three years. D) five years.
one year.
The two most important factors that cause the money demand curve to shift are A) real GDP and the price level. B) nominal GDP and the Fed. C) the price level and the nominal interest rate. D) the nominal interest rate and the money supply.
real GDP and the price level.
The term structure of interest rates A) represents the relationship among the interest rates on bonds that are otherwise similar but that have different maturities. B) reflects differing tax treatment received by different instruments. C) always results in an upward-sloping yield curve. D) usually results in a downward-sloping yield curve.
represents the relationship among the interest rates on bonds that are otherwise similar but that have different maturities.
Suppose that savers become much more willing to purchase a certain type of municipal bond. The result will be that the bond's price will A) fall relative to the price of U.S. Treasury securities but rise relative to the price of corporate bonds. B) rise relative to the price of U.S. Treasury securities but fall relative to the price of corporate bonds. C) rise relative to the prices of U.S. Treasury securities and corporate bonds. D) fall relative to the prices of U.S. Treasury securities and corporate bonds.
rise relative to the prices of U.S. Treasury securities and corporate bonds.
If the Fed INCREASES the money supply and as a result, households and firms buy more short-term financial assets, the prices of those short-term financial assets will ________ and the interest rates on those assets will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall
rise; fall
During the financial crisis of 2007-09, the prices of U.S. Treasury securities A) rose and the price of corporate bonds declined. B) fell relative to the prices of corporate bonds. C) remained in the same relative position to the prices of corporate bonds. D) were frozen by order of the federal government.
rose and the price of corporate bonds declined.
Monetary policy has traditionally focused on the A) long-term nominal interest rate. B) short-term nominal interest rate. C) long-term real interest rate. D) short-term real interest rate.
short-term nominal interest rate.
When the yield curve is downward-sloping A) short-term yields are higher than long-term yields. B) long-term yields are higher than short-term yields. C) the bond market is anticipating the U.S. Treasury may default on its obligations. D) the inflation rate is expected to rise.
short-term yields are higher than long-term yields
The default risk premium is A) relevant only for securities issued by very small companies. B) the additional yield a saver requires for holding a bond with some default risk. C) zero for corporate bonds, but quite substantial for corporate stock. D) constant across the business cycle.
the additional yield a saver requires for holding a bond with some default risk.
Many savers are willing to accept a lower interest rate on municipal bonds than on comparable instruments because A) the after-tax yield on municipal bonds is greater. B) municipal bonds invariably have lower default risk. C) municipal bonds are more liquid than most other instruments. D) the yield on municipal bonds is considered inflation proof.
the after-tax yield on municipal bonds is greater.
Investors often pay professional analysts to gather and monitor information on the creditworthiness of borrowers because A) federal law requires it. B) most investors are risk neutral. C) the cost of acquiring information about a borrower's creditworthiness can be high. D) doing so increases the net-of-tax yield on most investments.
the cost of acquiring information about a borrower's creditworthiness can be high.
Suppose that a small economy that had previously been closed becomes open. If its real interest rate had previously been below the world real interest rate, we would expect that A) the country's real interest rate would remain below the world level. B) the country would become a net lender abroad. C) the country would become a new borrower abroad. D) the amount of loanable funds supplied in the country would decline.
the country would become a net lender abroad.
In the market for loanable funds the price of the funds exchanged is A) the price of bonds. B) the volume of bonds purchased. C) the volume of bonds sold. D) the interest rate.
the interest rate.
In the market for loanable funds, the seller is considered to be A) the lender. B) the borrower. C) the lender or the borrower depending upon the use to which the funds are put. D) the lender or the borrower depending upon whether interest rates are rising or falling.
the lender.
The risk structure of interest rates refers to A) the amount of additional interest necessary to compensate savers for the greater risk of default on some bonds. B) the relationship among the interest rates on similar bonds with different maturities. C) the relationship among the interest rates on bonds with the same maturity. D) the amount of additional yield necessary to compensate savers for the lesser liquidity of some bonds.
the relationship among the interest rates on bonds with the same maturity.
The expectations theory suggests that A) the yield curve should usually be upward-sloping. B) the yield curve should usually be downward-sloping. C) the slope of the yield curve depends on the expected future path of short-term rates. D) the slope of the yield curve reflects the risk premium incorporated into the yields on long-term bonds.
the slope of the yield curve depends on the expected future path of short-term rates.
The greatest appeal of U.S. Treasury securities is that A) they have high yields. B) they have no default risk. C) the U.S. Treasury will repurchase them at any time. D) their market prices fluctuate very little.
they have no default risk.
In recent decades, the United States A) was essentially a closed economy. B) was generally a net borrower of foreign funds. C) was generally a net lender abroad. D) experienced a net outflow of savings.
was generally a net borrower of foreign funds.
Financial instruments with high information costs A) will usually be more liquid than similar instruments with low information costs. B) will have lower yields than U.S. Treasury securities. C) may not be offered for sale in some states. D) will have lower prices than similar instruments with low information costs.
will have lower prices than similar instruments with low information costs.