FINC 3310, Lesson 3, Ch. 5

________ bonds are the most liquid of all long-term bonds. U.S. Treasury Callable Corporate Aaa Municipal

U.S. Treasury

A steep upward sloping yield curve indicates that short-term interest rates are expected to ________ rise moderately in the near future. neither rise nor fall in the near future. remain relatively unchanged but that long-term rates are expected to fall. neither rise nor fall but that long-term rates are expected to rise moderately.

A

As a result of the Enron collapse and bankruptcy, the demand for lower quality corporate bonds ________, the demand for higher quality corporate bonds ________, and the risk spread ________. decreased; increased; increased decreased; increased; was unchanged increased; decreased; decreased increased; decreased; was unchanged

A

The ________ theory is the most widely accepted theory of the term structure of interest rates because it explains the major empirical facts about the term structure so well. liquidity premium market segmentation expectations none of the above

A

The risk structure of interest rates is ________ the relationship among interest rates of different bonds with the same maturity. the relationship among interest rates on bonds with different maturities. the structure of how interest rates move over time. the relationship among the terms to maturity of different bonds.

A

The term structure of interest rates is ________ the relationship among interest rates on bonds with different maturities. the relationship among the terms to maturity of different bonds. the structure of how interest rates move over time. the relationship among interest rates of different bonds with the same maturity.

A

When yield curves are steeply upward-sloping, ________ long-term interest rates are above short-term interest rates. short-term interest rates are above long-term interest rates. short-term interest rates are about the same as long-term interest rates. none of the above

A

Which of the following long-term bonds should have the lowest interest rate? Municipal bonds Corporate Baa bonds Corporate Aaa bonds U.S. Treasury bonds

A

Holding everything else constant, if a corporation begins to suffer large losses, then the default risk on its bonds will ________ and the expected return on those bonds will ________. increase: increase increase; decrease decrease; increase decrease; decrease

B

In actual practice, short-term interest rates are just as likely to fall as to rise; this is the major shortcoming of the ________ liquidity premium theory. expectations theory. market segmentation theory. separable markets theory.

B

When budget talks between congressional Republicans and President Clinton occurred in late 1995, fear of a government default ________, Treasury bond values ________, and interest rates on Treasury bonds ________. fell; fell; fell rose; fell; rose fell; rose; fell rose; rose; rose

B

A bond rating of Aa or AA would mean that the quality of the bond is ________ the highest. high. medium grade. speculative.

B) High

If Moody's or Standard and Poor's downgrades its rating on a corporate bond, the demand for the bond ________ and its yield ________. increases; increases decreases; decreases decreases; increases increases; decreases

C

If municipal bonds were to lose their tax-free status, then the demand for Treasury bonds would ________, and the interest rate on Treasury bonds would ________ decrease; rise. decrease; fall. increase; fall. increase; rise.

C

Moody's and Standard and Poor's are agencies that ________ maintain liquid markets for corporate bonds. advise municipal bond issuers on the tax exempt status of their bonds. produce information about the probability of default on corporate bonds. help investors collect when corporations default on their bonds.

C

Which of the following long-term bonds should have the highest interest rate? U.S. Treasury bonds Municipal bonds Corporate Aaa bonds Corporate Baa bonds

Corporate Baa bonds

An increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds and ________ the demand for U.S. government bonds. increasing; increasing decreasing; decreasing decreasing; increasing increasing; decreasing

D

If income tax rates were lowered, then ________ the interest rate on Treasury bonds would rise. the interest rate on municipal bonds would fall. the price of Treasury bonds would fall. the interest rate on municipal bonds would rise.

D

According to the market segmentation theory of the term structure, ________ the interest rate for bonds of one maturity is determined by supply and demand for bonds of that maturity. bonds of one maturity are not substitutes for bonds of other maturities; therefore, interest rates on bonds of different maturities do not move together over time. investors' strong preference for short-term relative to long-term bonds explains why yield curves typically slope upward. all of the above

D) all of the above

The risk structure of interest rates is explained by ________ default risk. liquidity. tax considerations. all of the above

DEFAULT RISK

When the default risk on corporate bonds decreases, other things equal, the demand for corporate bonds ________ and the demand for Treasury bonds ________. decreases; decreases increases; decreases increases; increases decreases; increases

increases; decreases

Bonds with relatively high risk of default are called ________ investment grade bonds. junk bonds. zero coupon bonds. Brady bonds.

junk bonds

Typically, yield curves are ________ gently downward-sloping. gently upward-sloping. mound shaped. flat.

usually upward-sloping

The relationship among interest rates on bonds with identical default risk, but different maturities, is called the ________ liquidity structure of interest rates. yield curve. bond demand curve. time-risk structure of interest rates.

yield curve

________ bonds are exempt from federal income taxes. Municipal Corporate Aaa Corporate Baa U.S. Treasury

Municipal