Fin4303 chapter 5

(I) If a corporate bond becomes less liquid, the interest rate on the bond will fall. (II) If a corporate bond becomes less liquid, the interest rate on Treasury bonds will fall.

(I) is false, (II) true.

During the budget negotiations in Congress in 1995-1996, and then again in 2011-2013, the Republicans threatened to let Treasury bonds default, and this had an impact on the bond market.

true

The risk structure of interest rates describes the relationship between the interest rates of different bonds with the same maturities.

true

The relationship among interest rates on bonds with identical default risk but different maturities is called the

yeild curve

When a municipal bond is given tax-free status, the demand for municipal bonds shifts ________, causing the interest rate on the bond to ________.

rightward fall

If income tax rates were lowered, then

the interest rate on municipal bonds would rise.

An increase in income tax rates will cause the interest rates on tax-exempt municipal bonds to fall relative to the interest rate on taxable corporate securities.

True

The interest rates on bonds of different maturities tend to move together over time.

True

If a corporation's earnings rise, then the default risk on its bonds will ________ and the equilibrium interest rate on these bonds will ________

decrease, decrease

A decrease in marginal tax rates would likely have the effect of ________ the demand for municipal bonds and ________ the demand for U.S. government bonds.

decreasing; increasing

When the corporate 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 , left

When the default risk on corporate bonds decreases, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.

right left

Of the four theories that explain how interest rates on bonds with different terms to maturity are related, the one that assumes that bonds of different maturities are not substitutes for one another is the

segmented market theory

Which of the following long-term bonds should have the lowest interest rate?

Municipal bonds

The expectations theory is able to explain why yield curves are usually upward-sloping

false

The expectations theory is able to explain why yield curves are usually upward-sloping.

false

The market segmentation theory is able to explain why interest rates on bonds of different maturities move together over time.

false

The risk premium on corporate bonds becomes smaller as the liquidity of the bonds falls.

false

The term structure of interest rates describes how interest rates move over time.

false

When yield curves are downward-sloping, long-term interest rates are above short-term interest rates.

false

With the Obama tax increase that repealed the Bush tax cuts for high-income tax payers in 2013, the after-tax expected return on tax-free municipal bonds relative to Treasury bonds decreases.

false

Corporate bonds are not as liquid as government bonds because

fewer bonds for any one corporation are traded, making them more costly to sell.

Economists' attempts to explain the term structure of interest rates

illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence.

Bonds with relatively high risk of default are called

junk bonds

Which theory of the term structure proposes that bonds of different maturities are not substitutes for one another?

market segmentaionn theory

________ cannot explain the empirical fact that interest rates on bonds of different maturities tend to move together.

market segmentation theory