Econ305 Chapter6

The expectations theory and the segmented markets theory do not explain the facts very well, but they provide the groundwork for the most widely accepted theory of the term structure of interest rates, ________. A) separable markets theory B) liquidity premium theory C) the asset market approach D) the Keynesian theory

B

If the expected path of one-year interest rates over the next five years 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) 7 percent B) 6 percent C) 5 percent D) 4 percent

B

If the probability of a bond default increases because corporations begin to suffer large losses, then the default risk on corporate bonds will ________ and the expected return on these bonds will ________, everything else held constant. A) decrease; increase B) increase; decrease C) increase; increase D) decrease; decrease

B

Three factors explain the risk structure of interest rates: ________. A) maturity, default risk, and the liquidity of a security B) liquidity, default risk, and the income tax treatment of a security C) maturity, default risk, and the income tax treatment of a security D) maturity, liquidity, and the income tax treatment of a security

B

A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium. A) negative; raise B) negative; lower C) positive; raise D) positive; lower

C

According to the expectations theory of the term structure, the interest rate on a long-term bond will equal the________ of the short-term interest rates that people expect to occur over the life of the long-term bond. A) sum B) multiple C) average D) difference

C

According to this theory of the term structure, bonds of different maturities are not substitutes for one another. A) Liquidity premium theory B) Separable markets theory C) Segmented markets theory D) Expectations theory

C

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

C

When Canada bonds become more liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Canada bonds shifts to the ________. A) left; left B) right; left C) left; right D) right; right

C

When yield curves are downward sloping, ________. A) short-term interest rates are about the same as long-term interest rates B) long-term interest rates are above short-term interest rates C) short-term interest rates are above long-term interest rates D) medium-term interest rates are above both short-term and long-term interest rates

C

If 1-year interest rates for the next three years are expected to be 4, 2, and 3 percent, and the 3-year term premium is 1 percent, than the 3-year bond rate will be ________. A) 1 percent B) 2 percent C) 3 percent D) 4 percent

D

If income tax rates were lowered, then ________. A) the price of Canada bonds would fall B) the interest rate on U.S. Treasury bonds would rise C) the interest rate on tax-exempt bonds would fall D) the interest rate on tax-exempt bonds would rise

D

If you have a very low tolerance for risk, which of the following bonds would you be least likely to hold in your portfolio? A) A corporate bond with a rating of Aaa B) A provincial bond C) A federal government bond D) A corporate bond with a rating of Baa

D

The risk structure of interest rates is ________. A) the relationship among interest rates on bonds with different maturities B) the structure of how interest rates move over time C) the relationship among the term to maturity of different bonds D) the relationship among interest rates of different bonds with the same maturity

D

The spread between the interest rates on bonds with default risk and default-free bonds is called the ________. A) bond margin B) junk margin C) default premium D) risk premium

D