quiz 3

During a "flight to quality" a. the spread between Treasury bonds and Baa bonds increases. b. the change in the spread between Treasury bonds and Baa bonds cannot be predicted. c. the spread between Treasury bonds and Baa bonds is not affected. d. the spread between Treasury bonds and Baa bonds decreases.

a

Everything else held constant, abolishing the individual income tax will a. increase the interest rate on municipal bonds. b. increase the interest rate on Treasury bonds. c. increase the interest rate on corporate bonds. d. reduce the interest rate on municipal bonds.

a

The Obama administration increased the tax on the top income tax bracket from 35% to 39%. Supply and demand analysis predicts the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds, all else the same. a. lower; higher b. lower; lower c. higher; higher d.higher; lower

a

Under the expectations theory if market participants expect that future short-term rates will be higher than current short-term rates, the yield curve will a. slope upward. b. slope upward, slope downward, or be flat, depending on risk, liquidity, cost of information, and tax considerations. c. be flat. d. slope downward.

a

When the yield curve is flat or downward-sloping, it suggest that the economy is more likely to enter a. a recession. b. a boom time. c. a period of increasing output. d. an expansion.

a

When yield curves are flat a. short-term interest rates are about the same as long-term interest rates. b. medium-term interest rates are above both short-term and long-term interest rates. c. long-term interest rates are above short-term interest rates. d. short-term interest rates are above long-term interest rates.

a

Which of the following long-term bonds has the highest interest rate? a. corporate Baa bonds b. corporate Aaa bonds c. municipal bonds d. U.S. Treasury bonds

a

Which of the following statements is TRUE? a. Bonds issued by state and local governments are called municipal bonds. b. The coupon payment on municipal bonds is usually higher than the coupon payment on Treasury bonds. c. State and local governments cannot default on their bonds.

a

A(n) ________ in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds, all else equal. a. increase; decrease; decrease b. increase; increase; decrease c. decrease; decrease; decrease d. decrease; increase; increase

b

If investors expect interest rates to fall significantly in the future, the yield curve will be inverted. This means that the yield curve has a ________ slope. a. flat b. downward c. slight upward d. steep upward

b

When the Treasury bond market becomes less liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________. a. right; right b. right; left c. left; right d. left; left

b

f the current one-year and two-year interest rates are 1.2% and 1.4%, respectively, what is the expected one-year interest rate next year? a. 1 percent. b. 1.6 percent. c. 3 percent. d. 1.3 percent.

b

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. 4.75% b. 4.975% c. 4.95% d. 4.5%

c

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. 15.25% b. 5.7% c. 3.8% d. 0.95%

c

If the expected path of one-year interest rates over the next five years, starting this year, is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five-year bond is a. 4 percent. b. 5 percent. c. 6 percent. d. 7 percent.

c

The additional incentive that the purchaser of a Treasury security requires to buy a long-term security rather than a short-term security is called the a. risk premium. b. tax premium. c. term premium. d. market premium.

c

The current one-year and two-year interest rates are 2.2% and 2.8%, respectively. According to the liquidity premium theory, what is the expected one-year interest rate next year if the term premium for two-year bonds is 0.2%? a. 1 percent. b. 2 percent. c. 3 percent. d. 4 percent.

c

According to the liquidity premium theory, a yield curve that is flat means that a. bond purchasers expect interest rates to stay the same. b. the yield curve has nothing to do with expectations of bond purchasers. c. bond purchasers expect interest rates to rise in the future. d. bond purchasers expect interest rates to fall in the future.

d

An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant. a. increase; increase b. increase; reduce c. reduce; reduce d. reduce; increase

d

Bonds with relatively high risk of default are called a. zero coupon bonds. b. Brady bonds. c. investment grade bonds. d. junk bonds.

d