Financial Markets chapter 5

(I) If a corporate bond becomes less liquid, the demand for the bond will fall, causing the interest rate to rise. (II) If a corporate bond becomes less liquid, the demand for Treasury bonds does not change. (I) is true, (II) false. (I) is false, (II) true. Both are true. Both are false.

(I) is true, (II) false.

According to the market segmentation theory of the term structure, the interest rate for bonds of one maturity is determined by the 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 these. None of these.

All of these.

Yield curves can be classified as upward-sloping. downward-sloping. flat. All of these.

All of these.

(I) An increase in default risk on corporate bonds shifts the demand curve for corporate bonds to the left. (II) An increase in default risk on corporate bonds shifts the demand curve for Treasury bonds to the right. (I) is true, (II) false. (I) is false, (II) true. Both are true. Both are false.

Both are true.

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

Municipal

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

Municipal bonds

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

U.S. Treasury

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; decreasing increasing; decreasing increasing; increasing decreasing; increasing

decreasing; increasing

The liquidity premium theory of the term structure :assumes investors tend to prefer short-term bonds because they have less interest-rate risk. assumes that interest rates on the long-term bond respond to demand and supply conditions for that bond. assumes that an average of expected short-term rates is an important component of interest rates on long-term bonds. assumes all of these. assumes none of these.

assumes all of these.

Based on the expectations hypothesis, the steep upward sloping yield curve in June of 2013 indicted that short-term rates would ________ in the future. remain the same change in a random fashion climb fall

climb

According to the liquidity premium theory of the term structure, a downward-sloping yield curve indicates that short-term interest rates are expected to rise in the future. decline moderately in the future. decline sharply in the future. remain unchanged in the future.

decline sharply in the future.

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

decrease; decrease

Holding everything else the same, if a corporation's earnings rise, then the default risk on its bonds will ________ and the expected return on those bonds will ________. decrease; decrease decrease; increase increase; decrease increase; increase

decrease; increase

The liquidity premium theory of the term structure indicates that today's long-term interest rate equals the average of short-term interest rates that people expect to occur over the life of the long-term bond. assumes that bonds of different maturities are perfect substitutes. suggests that markets for bonds of different maturities are completely separate because people have different preferences. does none of these.

does none of these.

When the yield curve is inverted, the yield curve is upward-sloping. bowl shaped. mound shaped. downward-sloping. flat.

downward-sloping.

The risk premium on corporate bonds becomes smaller if the riskiness of corporate bonds increases.the liquidity of corporate bonds increases. the liquidity of corporate bonds decreases. the riskiness of corporate bonds decreases. either the liquidity of corporate bonds increases or the riskiness of corporate bonds decreases occur.

either the liquidity of corporate bonds increases or the riskiness of corporate bonds decreases occur.

Corporate bonds are not as liquid as government bonds because fewer bonds for any one corporation are traded, making them more costly to sell. the corporate bond rating must be calculated each time they are traded. corporate bonds are not callable. All of these. only fewer bonds for any one corporation are traded, making them more costly to sell and the corporate bond rating must be calculated each time they are traded.

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

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

gently upward-sloping.

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

high.

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; decrease decrease; increase increase; increase decrease; decrease

increase; decrease

Bonds with relatively low risk of default are called zero coupon bonds. junk bonds. investment-grade bonds. None of these.

investment-grade bonds.

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

junk bonds.

The Bush tax cut passed in 2001 reduces the top income tax bracket from 39 percent to 35 percent over the next ten years. As a result of this tax cut, the demand for municipal bonds should shift to the ________ and the interest rate on municipal bonds should ________. left; decline right; decline right; increase left; increase

left; increase

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

neither rise nor fall in the near future.

According to the market segmentation theory of the term structure, investors' strong preference for short-term relative to long-term bonds explains why yield curves typically slope downward. only the interest rate for bonds of one maturity is determined by the supply and demand for bonds of that maturity and 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.

only the interest rate for bonds of one maturity is determined by the supply and demand for bonds of that maturity and 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.

A bond with default risk will always have a ________ risk premium, and an increase in its default risk will raise the risk premium. positive negative minimalun predictable

positive

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

produce information about the probability of default on corporate bonds.

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

rightward; fall

A steep upward-sloping yield curve indicates that short-term interest rates are expected to 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. rise moderately in the near future.

rise moderately in the near future.

The spread between the interest rates on bonds with default risk and default-free bonds, both of the same maturity, is called the rate premium. risk premium. market premium. bond premium.

risk premium.

According to the liquidity premium theory of the term structure, when the yield curve has its usual slope, the market expects short-term interest rates to rise sharply. short-term interest rates to drop sharply. short-term interest rates to stay near their current levels. None of these.

short-term interest rates to stay near their current levels.

If income tax rates rise, then the interest rate on Treasury bonds will rise. the interest rate on municipal bonds will rise. the prices of municipal bonds will fall. the prices of Treasury bonds will rise.

the interest rate on Treasury bonds will rise.

According to the liquidity premium theory of the term structure, because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time. the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. because of the positive term premium, the yield curve cannot be downward-sloping. All of these.

the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium.

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

the interest rate on municipal bonds would rise.

The risk structure of interest rates is the relationship among interest rates on bonds with different maturities. the relationship among interest rates of different bonds with the same maturity. 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.

The spread between interest rates on low-quality corporate bonds and U.S. government bonds ________ during the Great Depression. was reversed narrowed significantly widened significantly did not change

widened significantly

If a bond has a favorable tax treatment, its required interest rate (all else equal) will be higher. will not be affected. will be lower. All of these could happen.

will be lower.

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

yield curve.