Ch.6

If you are comparing a corporate bond yield of 12% with a Treasury bond yield of 6%, then the default risk premium is 1. 6% 2. 12% 3. 24% 4. 18%

1. 6%

If a Treasury yield curve slopes upward to the right, what is the correct interpretation? 1. Lower yields imply higher demand and higher bond prices. 2. Higher yields imply higher demand and higher bond prices. 3. Lower yields imply lower demand and lower bond prices.

1. Lower yields imply higher demand and higher bond prices.

Which of the following statements best defines the default risk premium? 1. The default-risk premium is the higher yield an investor requires for higher default risk. 2. The default-risk premium is the lower yield an investor requires for higher default risk. 3. The default-risk premium is also known as the market-risk premium.

1. The default-risk premium is the higher yield an investor requires for higher default risk.

The segmented markets theory 1. provides an explanation of the upward slope of the Treasury yield curve, but cannot explain parallel shifts in the curve 2. provides a logical explanation of why parallel shifts occur in the Treasury yield curve 3. explains why bonds of different maturities are perfect substitutes 4. cannot explain the upward slope of the Treasury yield curve

1. provides an explanation of the upward slope of the Treasury yield curve, but cannot explain parallel shifts in the curve

If market participants believe that the default risk is increasing, the likely result will be a 1. rise in demand for default risk-free bonds, a fall in demand for high-default-risk bonds, and a larger risk premium 2. fall in default risk-free bond prices 3. fall in demand for default risk-free bonds, a rise in demand for high default-risk bonds, and a smaller risk premium

1. rise in demand for default risk-free bonds, a fall in demand for high-default-risk bonds, and a larger risk premium

The term structure of interest rates explains why 1. yields differ for financial instruments with differing maturities 2. the Treasury yield curve always slopes upward 3. yields are held constant along a given Treasury yield curve 4. yields differ for financial instruments with the same maturities

1. yields differ for financial instruments with differing maturities

A schedule of one-year interest rates for bonds maturing in 1, 2, 3,and 4 years, successively, is 8%, 9%, 10%, and 11%. According to the expectations theory, the expected one year rate two years ahead is 1. 17% 2. 12% 3. 8.5% 4. 10%

2. 12%

If the fluctuations in expected real interest rates are small, then which of the following statements provides an explanation of how the upward-sloping yield curve can be used for economic forecasting? 1. If real interest rates are constant, then an upward sloping yield curve suggests that lower inflation is expected. 2. If real interest rates are constant, then an upward sloping yield curve means higher inflation is expected. 3. An upward sloping yield curve provides a signal that a recession is likely.

2. If real interest rates are constant, then an upward sloping yield curve means higher inflation is expected.

The preferred-habitat theory 1. can explain the upward shift of the yield curve, but cannot explain the parallel shifts in the curve as in the case of the expectations theory 2. shows the same pattern of future short-term rates as shown by the expectations theory 3. shows a more significant expected decline in short-term rates than the expectation theory shows

3. shows a more significant expected decline in short-term rates than the expectation theory shows

If you believed strongly in the expectations theory, you would likely 1. agree with the conclusion that the expectations theory explains the upward slope of the yield curve, but not parallel shifts in the curve 2. change your relative demand for instruments of different maturities to take advantage of different yields 3. be unable to infer expectations of future short-term rates from current long-term rates 4. believe that expected returns would be about equal for bonds of different maturities

4. believe that expected returns would be about equal for bonds of different maturities