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Exam 6: The Risk and Term Structure of Interest Rates

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Question 31

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Which of the following statements is true?

A) State and local governments cannot default on their bonds.
B) Bonds issued by state and local governments are called municipal bonds.
C) All government issued bonds - local, state, and federal - are federal income tax exempt.
D) The coupon payment on municipal bonds is usually higher than the coupon payment on Treasury bonds.

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Question 32

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If 1-year interest rates for the next five years are expected to be 4,2,5,4,and 5 percent,and the 5-year term premium is 1 percent,than the 5-year bond rate will be

A) 2 percent.
B) 3 percent.
C) 4 percent.
D) 5 percent.

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Question 33

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If the yield curve slope is flat for short maturities and then slopes steeply upward for longer maturities,the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting

If the expected path of 1-year interest rates over the next five years is 2 percent,4 percent,1 percent,4 percent,and 3 percent,the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of

A decrease in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield of Treasury bonds,everything else held constant.

A plot of the interest rates on default-free government bonds with different terms to maturity is called

-The steeply upward sloping yield curve in the figure above indicates that ________ interest rates are expected to ________ in the future.

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(n) ________ in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds,all else equal.

According to the liquidity premium theory of the term structure,a steeply upward sloping yield curve indicates that short-term interest rates are expected to

According to the liquidity premium theory,a yield curve that is flat means that

A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium.

Which of the following long-term bonds has the highest interest rate?

An increase in default risk on corporate bonds ________ the demand for these bonds,but ________ the demand for default-free bonds,everything else held constant.

Typically,yield curves are

Bonds with no default risk are called

Which of the following securities has the lowest interest rate?

According to the liquidity premium theory of the term structure,a flat yield curve indicates that short-term interest rates are expected to

When yield curves are downward sloping,

If a corporation begins to suffer large losses,then the default risk on the corporate bond will