When the default risk in corporate bonds decreases, other things equal, the demand curve for corporate bonds shifts to the _____ and the demand curve for Treasury bonds shifts to the _____.

QUESTIONS WITH CHOICES

) The term structure of interest rates is
A) the relationship among interest rates of different bonds with the same maturity.
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 on bonds with different maturities.
2) When the default risk in corporate bonds decreases, 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; left D) left; right
3) When the Treasury bond market becomes more 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
4) The risk premium on corporate bonds becomes smaller if
A) the riskiness of corporate bonds increases.
B) the liquidity of corporate bonds increases.
C) the liquidity of corporate bonds decreases.
D) the riskiness of corporate bonds decreases.
E) both (b) and (d) occur.
5) The risk premium on corporate bonds rises when
A) brokerage commissions fall in the corporate bond market.
B) a flurry of major corporate bankruptcies occurs.
C) the Treasury bond market becomes less liquid.
D) any of the above occurs.
6) The interest rate on municipal bonds falls relative to the interest rate on Treasury securities when
A) there is a major default in the municipal bond market.
B) income tax rates are raised.
C) municipal bonds become less widely traded.
D) corporate bonds become riskier.
E) none of the above occur.
7) If income tax rates were lowered, then
A) the prices of municipal bonds would fall.
B) the interest rate on municipal bonds would fall.
C) the interest rate on Treasury bonds would rise.
D) both (a) and (b) would occur.
8) If income tax rates were lowered, then
A) the interest rate on municipal bonds would rise.
B) the interest rate on Treasury bonds would fall.
C) the interest rate on municipal bonds would fall.
D) both (a) and (b) would occur.
E) both (b) and (c) would occur.
9) A plot of the interest rates on default-free government bonds with different terms to maturity is called
A) a risk-structure curve. B) a term-structure curve.
C) a yield curve. D) an interest-rate curve.
10) The liquidity premium theory of the term structure
A) 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.
B) assumes that bonds of different maturities are perfect substitutes.
C) suggests that markets for bonds of different maturities are completely separate because people have preferred habitats.
D) does none of the above.
11) Which of the following theories of the term structure is (are) able to explain the fact that interest rates on bonds of different maturities tend to move together over time?
A) The expectations theory
B) The segmented markets theory
C) The liquidity premium theory
D) Both (a) and (b) of the above
E) Both (a) and (c) of the above
12) 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) 4 percent. B) 5 percent. C) 6 percent. D) 7 percent. E) 8 percent.
13) If the yield curve is flat for short maturities and then slopes downward for longer maturities, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting.
A) a rise in short-term interest rates in the near future and a decline further out in the future.
B) constant short-term interest rates in the near future and a decline further out in the future.
C) a decline in short-term interest rates in the near future and a rise further out in the future.
D) a decline in short-term interest rates in the near future and an even steeper decline further out in the future.
14) Interest rates on bonds of the same maturity will differ because of differences in
A) liquidity.
B) risk.
C) income tax treatment.
D) all of the above.
E) only (a) and (b) of the above.
15) If a corporation begins to suffer large losses, then
A) the default risk on the corporate bond will increase and the bond’s return will become more uncertain, meaning the expected return on the corporate bond will fall.
B) the default risk on the corporate bond will increase and the bond’s return will become less uncertain, meaning the expected return on the corporate bond will fall.
C) the default risk on the corporate bond will decrease and the bond’s return will become less uncertain, meaning the expected return on the corporate bond will fall.
D) the default risk on the corporate bond will decrease and the bond’s return will become less uncertain, meaning the expected return on the corporate bond will rise.
16) The theory of asset demand predicts that as the possibility of a default on a corporate bond decreases, the expected return on the bond _____ while its relative riskiness _____.
A) rises; rises B) rises; falls C) falls; rises D) falls; falls
17) The theory of asset demand predicts that a decline in the expected return on corporate bonds due to a rise in relative riskiness causes
A) a decline in the demand for default-free bonds.
B) an increase in the demand of corporate bonds.
C) a decline in the demand for corporate bonds.
D) a decline in the supply of corporate bonds.
18) Corporate bonds are not as liquid as government bonds because
A) fewer corporate bonds for any one corporation are traded, making them more costly to sell.
B) the corporate bond rating must be calculated each time they are traded.
C) corporate bonds are not callable.
D) of all of the above.
E) of only (a) and (b) of the above.
19) The risk structure of interest rates is explained by differences in
A) the bonds’ relative default risks.
B) the bonds’ relative liquidity.
C) the bond’s relative tax treatment.
D) all of the above.
E) only (a) and (b) of the above.
20) Factors that influence interest rates on bonds include
A) risk.
B) liquidity.
C) tax considerations.
D) term to maturity.
E) all of the above.
21) Typically, yield curves are
A) gently upward sloping.
B) gently downward sloping.
C) flat.
D) bowl shaped.
E) mound shaped.
22) When yield curves are steeply upward sloping,
A) long-term interest rates are above short-term interest rates.
B) short-term interest rates are above long-term interest rates.
C) short-term interest rates are about the same as long- term interest rates.
D) medium-term interest rates are above both short-term and long-term interest rates.
E) medium-term interest rates are below both short-term and long-term interest rates.
23) When yield curves are downward sloping,
A) long-term interest rates are above short-term interest rates.
B) short-term interest rates are above long-term interest rates.
C) short-term interest rates are about the same as long- term interest rates.
D) medium-term interest rates are above both short-term and long-term interest rates.
E) medium-term interest rates are below both short-term and long-term interest rates.
24) When yield curves are flat,
A) long-term interest rates are above short-term interest rates.
B) short-term interest rates are above long-term interest rates.
C) short-term interest rates are about the same as long- term interest rates.
D) medium-term interest rates are above both short-term and long-term interest rates.
E) medium-term interest rates are below both short-term and long-term interest rates.
25) According to the expectations theory of the term structure
A) 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.
B) buyers of bonds do prefer short-term to long-term bonds.
C) interest rates on bonds of different maturities do not move together over time.
D) all of the above.
26) According to the expectations theory of the term structure
A) 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.
B) interest rates on bonds of different maturities are not expected to move together over time since buyers of bonds prefer short-term to long-term bonds.
C) investors’ strong preferences for short-term relative to long-term bonds explains why yield curves typically slope upward.
D) all of the above.
E) only (a) and (b) of the above.
27) According to the segmented markets theory of the term structure
A) the interest rate for each maturity bond is determined by supply and demand for that maturity bond.
B) 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.
C) investors’ strong preferences for short-term relative to long-term bonds explains why yield curves typically slope upward.
D) all of the above.
E) none of the above.
28) Bonds with no default risk are called
A) flower bonds. B) no-risk bonds.
C) default-free bonds. D) zero-risk bonds.
 

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