Finance 320 Chapter 5

The risk structure of interest rates refers toA.the relationship among the interest rates on similar bonds with different maturities.B.the amount of additional yield necessary to compensate savers for the lesser liquidity of some bonds.C.the amount of additional interest necessary to compensate savers for the greater risk of default on some bonds.D.the relationship among the interest rates on bonds with the same maturity. D
Default risk arises from the fact thatA.it is inherently riskier to wait for a capital gain than to receive an immediate interest payment.B.borrowers differ in their ability to repay in full the principal and interest required by a loan agreement.C.interest rates are far more likely to go up than to go down.D.the bond price drops when interest rates rise. B
The risk premium of corporate bonds typically increasesA.when the risk premium on treasury bonds increases.B.when the average price of corporate bonds increase.C.when the interest rates on corporate bonds decreases. D.during a recession. D
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.​0.95%B.​5.7%C.​15.25%D.​3.8% D
The default risk premium is measuredA.by an index published monthly by The Wall Street Journal.B.as the difference between the yield on a non−Treasury security and the yield on a U.S. Treasury security of the same maturity.C.by an index published monthly by the Securities and Exchange Commission.D.as the difference between the nominal yield on the security and the real after−tax yield on the security. B
Bond ratingsA.are published by private bond−rating agencies.B.are published monthly by the federal government and are based on publicly available information.C.are published annually by the federal government and are based on publicly available information.D.are published annually by the federal government and are based largely on information contained in corporate tax returns. A
Which of the following statements about junk ​(high−​risk) bonds is​ true?A.They never outperform treasury bonds since​ they’re too risky.B.The price of junk bonds increase as their perceived risk increases.C.They tend to perform best during recessions.D.One can profit by owning them if market perceptions of their risk decline. D
If lenders anticipate no changes in​ liquidity, information​ costs, and tax​ differences, the yield on a risky security should beA.less than that on a safe security and the price of a risky security should be greater than that on a safe security.B.greater than that on a safe security and the price of a risky security should be lower than that of a safe security.C.less than that on a safe security and the price of a risky security should also be less than that of a safe security.D.greater than that on a safe security and the price of a risky security should also be greater than that of a safe security. B
A flight to quality refers to a shift by savers fromA.low−quality bonds and into high-quality bonds.B.bonds and into real​ assets, such as real estate.C.bonds and into stocks.D.stocks and into gold or other precious metals. A
A company that retains a high bond rating during a recession in which many other companies see their bond ratings cut will experienceA.a decreased demand for its​ securities, resulting in a lower expected return.B.a decreased flow of funds into the market for its securities.C.an increased flow of funds into the market for its securities.D.an increased demand for its​ securities, resulting in a higher expected return. C
Suppose that savers become much more willing to purchase a certain type of municipal bond. The result will be that the​ bond’s price willA.fall relative to the price of U.S. Treasury securities but rise relative to the price of corporate bonds.B.rise relative to the price of U.S. Treasury securities but fall relative to the price of corporate bonds.C.fall relative to the prices of U.S. Treasury securities and corporate bonds.D.rise relative to the prices of U.S. Treasury securities and corporate bonds. D
Following the downgrade of U.S. debt by Standard​ & Poor’s in​ August, 2011:A.other rating agencies also downgraded U.S. debtB.the U.S. implemented a plan to significantly reduce its budget deficit later that yearC.investors​ didn’t seem to be any more concerned about default risk than before the downgradeD.interest rates spiked as​ investor’s perception of risk increased C
Municipal bonds are issuedA.only by state governments.B.by both state and local governments.C.only by local governments.D.by the federal​ government, and by state and local governments. B
Many savers are willing to accept a lower interest rate on municipal bonds than on comparable instruments becauseA.municipal bonds invariably have lower default risk.B.the after−tax yield on municipal bonds is greater.C.municipal bonds are more liquid than most other instruments.D.the yield on municipal bonds is considered inflation proof. B
Interest and capital gains are taxed differently in the United States in thatA.capital gains when realized are exempt from state and local taxes.B.interest is taxed as ordinary​ income, but capital gains are taxed only when realized.C.interest is taxed as ordinary​ income, but capital gains are taxed as accrued.D.interest is exempt from state and local taxes. B
Which of the following statements is​ true?A.The yield curve illustrates the relative default risks of alternative types of bonds.B.Tax−free bonds normally have a higher interest rate than other types of bonds.C.The more liquid the​ bond, the lower the yield.D.The price of a bond increases as it becomes more risky. C
Some claim that ratings agencies have a conflict of interest​ since:A.government began to include bond ratings as part of regulations of mutual​ funds, banks, and financial firmsB.they issued many of the mortgages that were later securitized into bondsC.since agencies charge firms for their services rather than​ investors, they have an incentive to give high ratings to gain businessD.they rate the quality of their own bonds C
Which of the following accurately describes the tax treatment of municipal​ bonds?A.Interest is tax​ free, but realized capital gains are taxable.B.Interest is​ taxable, but capital gains are tax free.C.Interest is tax​ free, but unrealized capital gains are taxable.D.All income from municipal bonds is tax free. A
The term structure of interest ratesA.represents the relationship among the interest rates on bonds that are otherwise similar but that have different maturities.B.usually results in a downward−sloping yield curve.C.always results in an upward−sloping yield curve.Your answer is not correct.D.reflects differing tax treatment received by different instruments. A
The term structure is usually defined with yields on which​ securities?A.Commercial paperB.Corporate bondsC.U.S. Treasury securitiesD.Municipal bonds C
When the yield curve is downward−​sloping,A.short−term yields are higher than long−term yields.B.long−term yields are higher than short−term yields.C.the bond market is anticipating the U.S. Treasury may default on its obligations.D.the inflation rate is expected to rise. A
The segmented markets theoryA.explains upward−sloping yield curves as resulting from the favorable tax treatment of long−term bonds.B.is unable to account for upward−sloping yield curves.C.explains upward−sloping yield curves as resulting from the demand for long−term bonds being high relative to the demand for short−term bonds.D.explains upward−sloping yield curves as resulting from the demand for long−term bonds being low relative to the demand for short−term bonds. D
The segmented markets theoryA.provides a good explanation of why yields on instruments of different maturities tend to move together.B.has difficulty explaining why yield curves usually slope up.C.has difficulty explaining why yields on instruments of different maturities tend to move together.D.has difficulty explaining why yield curves usually slope down. C
The expectations theory suggests thatA.the yield curve should usually be upward−sloping.B.the slope of the yield curve reflects the risk premium incorporated into the yields on long-term bonds.C.the slope of the yield curve depends on the expected future path of short−term rates.D.the yield curve should usually be downward−sloping. C
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 three−year bond according to the liquidity premium​ theory?A.​5.05%B.​4.68%C.​4.85%D.​4.5% C
According to the liquidity premium​ theory, a steep yield curve may be an indicator ofA.expectations of a significant increase in inflation.B.lower future short−term interest rates.C.an upcoming recession.D.an economic slowdown. 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 willA.slope upward.B.slope​ upward, slope​ downward, or be​ flat, depending on​ risk, liquidity, cost of​ information, and tax considerations.C.slope downward.D.be flat. A
According to the liquidity premium theoryA.investors are indifferent between short and long maturities.B.investors prefer shorter to longer maturities.C.investors prefer longer to shorter maturities.D.investors are more interested in the tax treatment of bonds than they are in the liquidity of bonds. B
Under the liquidity premium theory the shape of the yield curve depends onA.the expected pattern of future short−term rates and the size of the term premium at each maturity.B.the relative return of investments in common stocks versus investments in corporate bonds.C.the size of the federal​ government’s budget deficit.D.government tax treatment of long−term versus short−term bonds. A
What is a primary reason for the yield on​ 3-month Treasury bills being low during​ recessions?A.the Fed pushing short−term interest rates downB.rising inflationC.low risk premiumD.the inversion of the yield curve A
Situations of negative interest rates on​ short-term bonds resulted​ from:A.very low risk premiumsB.investors were looking for safe havens when other investments were perceived to be very riskyC.government regulations requiring financial firms to purchase government bondsD.high income tax rates B
Almost every time that there has been an inverted yield​ curve, what took place within one​ year?A.recessionB.financial crisisC.rising inflationD.higher bond yields A

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