The spread between interest rates on low quality corporate bonds and U.S. government bonds

widened significantly during the Great Depression.

narrowed significantly during the Great Depression.

narrowed moderately during the Great Depression.

did not change during the Great Depression.

During a "flight to quality"

the spread between Treasury bonds and Baa bonds increases.

the spread between Treasury bonds and Baa bonds decreases.

the spread between Treasury bonds and Baa bonds is not affected.

the change in the spread between Treasury bonds and Baa bonds cannot be predicted.

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 corporate bond with a rating of Baa

a corporate bond with a rating of Aaa

Which of the following statements are true?

A liquid asset is one that can be quickly and cheaply converted into cash.

The demand for a bond declines when it becomes less liquid, decreasing the interest rate spread between it and relatively more liquid bonds.

The differences in bond interest rates reflect differences in default risk only.

The corporate bond market is the most liquid bond market.

Corporate bonds are not as liquid as government bonds because

fewer corporate bonds for any one corporation are traded, making them more costly to sell.

the corporate bond rating must be calculated each time they are traded.

corporate bonds are not callable.

corporate bonds cannot be resold.

Everything else held constant, if the tax-exempt status of municipal bonds were eliminated, then

the interest rate on municipal bonds would exceed the rate on Treasury bonds.

the interest rates on municipal bonds would still be less than the interest rate on Treasury bonds.

the interest rate on municipal bonds would equal the rate on Treasury bonds.

the interest rates on municipal, Treasury, and corporate bonds would all increase.

Municipal bonds have default risk, yet their interest rates are lower than the rates on default-free Treasury bonds. This suggests that

the benefit from the tax-exempt status of municipal bonds exceeds their default risk.

the benefit from the tax-exempt status of municipal bonds is less than their default risk.

the benefit from the tax-exempt status of municipal bonds equals their default risk.

Treasury bonds are not default-free.

Everything else held constant, the interest rate on municipal bonds rises relative to the interest rate on Treasury securities when

municipal bonds become more widely traded.

corporate bonds become riskier.

Everything else held constant, if income tax rates were lowered, then

the interest rate on municipal bonds would rise.

the interest rate on municipal bonds would fall.

the interest rate on Treasury bonds would rise.

the price of Treasury bonds would fall.

Everything else held constant, abolishing all taxes will

increase the interest rate on municipal bonds.

increase the interest rate on corporate bonds.

reduce the interest rate on municipal bonds.

increase the interest rate on Treasury bonds.

Which of the following statements are true?

Because the tax-exempt status of municipal bonds was of little benefit to bond holders when tax rates were low, they had higher interest rates than U.S. government bonds before World War II.

An increase in tax rates will increase the demand for Treasury bonds, lowering their interest rates.

Interest rates on municipal bonds will be higher than comparable bonds without the tax exemption.

Because coupon payments on municipal bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in lower income tax brackets.

Three factors explain the risk structure of interest rates:

liquidity, default risk, and the income tax treatment of a security.

maturity, default risk, and the income tax treatment of a security.

maturity, liquidity, and the income tax treatment of a security.

maturity, default risk, and the liquidity of a security.

When yield curves are steeply upward sloping,

long-term interest rates are above short-term interest rates.

short-term interest rates are above long-term interest rates.

short-term interest rates are about the same as long-term interest rates.

medium-term interest rates are above both short-term and long-term interest rates.

When yield curves are flat,

short-term interest rates are about the same as long-term interest rates.

long-term interest rates are above short-term interest rates.

short-term interest rates are above long-term interest rates.

medium-term interest rates are above both short-term and long-term interest rates.

When yield curves are downward sloping,

short-term interest rates are above long-term interest rates.

long-term interest rates are above short-term interest rates.

short-term interest rates are about the same as long-term interest rates.

medium-term interest rates are above both short-term and long-term interest rates.

Economists' attempts to explain the term structure of interest rates

illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence.

illustrate how economists continue to accept theories that fail to explain observed behavior of interest rate movements.

prove that the real world is a special case that tends to get short shrift in theoretical models.

have proved entirely unsatisfactory to date.

According to the expectations theory of the term structure

interest rates on bonds of different maturities move together over time.

the interest rate on long-term bonds will exceed the average of short-term interest rates that people expect to occur over the life of the long-term bonds, because of their preference for short-term securities.

buyers of bonds prefer short-term to long-term bonds.

buyers require an additional incentive to hold long-term bonds.

According to the expectations theory of the term structure

yield curves should be equally likely to slope downward as slope upward.

when the yield curve is steeply upward sloping, short-term interest rates are expected to remain relatively stable in the future.

when the yield curve is downward sloping, short-term interest rates are expected to remain relatively stable in the future.

investors have strong preferences for short-term relative to long-term bonds, explaining why yield curves typically slope upward.

According to the segmented markets theory of the term structure

the interest rate for each maturity bond is determined by supply and demand for that maturity bond.

bonds of one maturity are close substitutes for bonds of other maturities, therefore, interest rates on bonds of different maturities move together over time.

investors' strong preferences for short-term relative to long-term bonds explains why yield curves typically slope downward.

because of the positive term premium, the yield curve will not be observed to be downward-sloping.

According to the segmented markets theory of the term structure

interest rates on bonds of different maturities do not move together over time.

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.

buyers of bonds do not prefer bonds of one maturity over another.

buyers require an additional incentive to hold long-term bonds.

A key assumption in the segmented markets theory is that bonds of different maturities

are substitutes only if the investor is given a premium incentive.

are substitutes but not perfect substitutes.

Chap 6 M&B

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Chap 6 M&B

102 questions

The risk structure of interest rates is

The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is

Bonds with no default risk are called

Which of the following bonds are considered to be default–risk free?

U.S. government bonds have no default risk because

The spread between the interest rates on bonds with default risk and default–free bonds is called the

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

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

If the possibility of a default increases because corporations begin to suffer losses, then the default risk on corporate bonds will _, and the bonds’ returns will become _, meaning that the expected return on these bonds will decrease, everything else held constant.

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Chap 6 M&B

102 questions

The risk structure of interest rates is

The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is

Bonds with no default risk are called

Which of the following bonds are considered to be default–risk free?

U.S. government bonds have no default risk because

The spread between the interest rates on bonds with default risk and default–free bonds is called the

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

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

If the possibility of a default increases because corporations begin to suffer losses, then the default risk on corporate bonds will _______, and the bonds’ returns will become _______, meaning that the expected return on these bonds will decrease, everything else held constant.

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

If the possibility of a default increases because corporations begin to suffer losses, then the default risk on corporate bonds will _, and the bonds’ returns will become _, meaning that the expected return on these bonds will decrease, everything else held constant.