Quiz 6, Chapter 6

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School

Western Michigan University *

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3200

Subject

Economics

Date

Feb 20, 2024

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Question 1 (1 point) Saved 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 p O1q percent. 2 2 percent. ) L33 percent. (® ®)4) 4 percent. O LJ)35) s percent. Question 2 (1 point) Saved 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. (‘) 1) a decline in short-term interest rates in the near future and an even steeper decline further out in the future. O 22 decline in short-term interest rates in the near future and a rise further out in the future. O 3) 2 rise in short-term interest rates in the near future and a decline further out in the future. O 4) constant short-term interest rates in the near future and a decline further out in the future.

Question 3 (1 point) Saved According to the liquidity premium theory of the term structure, a flat yield curve indicates that e /1) short-term interest rates are expected to rise in the future. 2 short-term interest rates are expected to remain unchanged in the future. (o) @) 3) short-term interest rates are expected to decline moderately in the future. ()4 short-term interest rates are expected to decline sharply in the future. Question 4 (1 point) Saved According to the expectations theory of the term structure O 1) when the yield curve is downward sloping, short-term interest rates are expected to decline in the future. M\ 2 yield curves should be as equally likely to slope downward as slope upward. O) ) w ) when the yield curve is steeply upward sloping, short-term interest rates are expected to rise in the future. ® 4) 411 of the above. O 5) only Aand B of the above.

Question 5 (1 point) Saved According to the segmented markets theory of the term structure (’\ 1) investors' strong preferences for short-term relative to long-term bonds explains why yield curves typically slope downward. () 2) bonds of one maturity are close substitutes for bonds of other maturities, ) therefore, interest rates on bonds of different maturities move together over time. @ 3) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. () 4) a1l of the above. Question 6 (1 point) Saved If 1-year interest rates for the next two years are expected to be 4 and 2 percent, and the 2-year term premium is 1 percent, than the 2-year bond rate will be ™ O 1) 1 percent. O 2) 2 percent. (\> 3)3 percent. ® 4 4 percent. \—> 5) 5 percent.

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The steeply upward sloping yield curve in Figure 6-1 indicates that: Figure 6-1 ()‘ 1) short-term interest rates are expected to remain unchanged in the future. () 2) short-term interest rates are expected to fall sharply in the future. (‘) ) short-term interest rates are expected to rise in the future. Q,) 4) short-term interest rates are expected to fall moderately in the future. Question 8 (1 point) Saved True or False? According to the segmented markets theory of the term structure, bonds of one maturity are not substitutes for bonds of other maturities, and therefore, interest rates on bonds of different maturities do not move together over time.

Question 9 (1 point) Saved According to the liquidity premium theory of the term structure, a slightly upward sloping yield curve indicates that O /1) short-term interest rates are expected to rise in the future. y (. 2) short-term interest rates are expected to remain unchanged in the future. ~ ' 3) short-term interest rates are expected to decline moderately in the future. ) 4) short-term interest rates are expected to decline sharply in the future. Question 10 (1 point) Saved According to the expectations theory of the term structure (\) 1) when the yield curve is steeply upward sloping, short-term interest rates are expected to rise in the future. O 2) when the yield curve is downward sloping, short-term interest rates are expected to decline in the future. O 3) investors have strong preferences for short-term relative to long-term bonds, explaining why yield curves typically slope upward. O -/ 4) all of the above. (@ 5) only A and B of the above.

Question 11 (1 point) Saved 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 ‘/'\ 1) percent. O 2) 2 percent. O) (J)3)3 percent. O L 4) 4 percent. =y (!/\ 5) 5 percent. Question 12 (1 point) Saved Of the following long-term bonds, the one with the highest interest rate is 7\ 1) U.s. Treasury bonds. O 2) municipal bonds. r\ '/ 3) corporate Baa bonds. @ 4) corporate Caa bonds.

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Question 13 (1 point) Saved If 1-year interest rates for the next four years are expected to be 4, 2, 3, and 3 percent, and the 4-year term premium is 1 percent, than the 4-year bond rate will be ) 1)1 percent. 2 2 percent. P Oy 3 percent. =\ @/ 4) 4 percent. - )55 percent. Question 14 (1 point) Saved 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 I ) 1) 5 percent. N O 2) g percent. ) )37 percent. p D) L 4) 4 percent. ~ (9/ 5) 6 percent.

Question 15 (1 point) Saved Which of the following statements are true? (\) 1 A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. A corporate bond's return becomes more uncertain as default risk ® increases. As their relative riskiness increases, the expected return on corporate bonds increases relative to the expected return on default-free bonds. O3 ) . P ./ 4) The expected return on corporate bonds increases as default risk increases. Question 17 (1 point) Saved According to the liquidity premium theory of the term structure, a downward sloping yield curve indicates that ) '/ 1) short-term interest rates are expected to rise in the future. O) -/ 2) short-term interest rates are expected to remain unchanged in the future. O /) 3) short-term interest rates are expected to decline moderately in the future. @ 4) short-term interest rates are expected to decline sharply in the future.

Question 18 (1 point) Saved True or false? According to the expectations theory of term structure, yield curves should be as equally likely to slope downward as slope upward. The U-shaped yield curve in Figure 6-2 indicates that short-term interest rates are expected to Figure 6-2 ~ () 1) rise in the near-term and fall later on ‘>‘ 2) fall moderately in the near-term and rise later on M {_J 3) remain unchanged in the near-term and rise later on @ 4) fall sharply in the near-term and rise later on

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Question 20 (1 point) Saved If income tax rates were lowered, then ‘/\ /1) the prices of municipal bonds would fall. O 2) the prices of Treasury bonds would rise. ) . . () 3) the interest rate on Treasury bonds would rise. ® 4) both A and B would occur. Question 21 (1 point) Saved Which of the following statements are true? (’) 1) The demand for a bond declines when it becomes less liquid, increasing the ) interest rate spread between it and relatively more liquid bonds. O 2) The differences in bond interest rates reflect differences in both default risk and liquidity. s \) 3) A liquid asset is one that can be quickly and cheaply converted into cash. @ 4) All of the above are true statements. - \) 5) Only A and B are true statements.

Question 22 (1 point) Saved Which of the following statements are true? O . . 1) A corporate bond's return becomes less uncertain as default risk increases. \) 2) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. () 3) As their relative riskiness increases, the expected return on corporate bonds increases relative to the expected return on default-free bonds. (® 4) The expected return on corporate bonds decreases as default risk increases. Question 23 (1 point) Saved If the expected path of 1-year interest rates over the next four years is 5 percent, 4 percent, 2 percent, and 1 percent, then the expectations theory predicts that today's interest rate on the four-year bond is O 1) percent. O \J2) 2 percent. O 35 percent. M ) () 4) 4 percent. @ 53 percent.

Question 24 (1 point) Saved True or false? The liquidity premium theory of the term structure 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. <) 1) True. S ©® 2 False. Question 25 (1 point) Saved True or false? According to the expectations theory of term structure, buyers of bonds do not prefer bonds of one maturity over another. Question 26 (1 point) Saved When the yield curve is upward sloping, f\/ 1) the liquidity premium theory suggests that short-term interest rates are expected to fall. (} 2) the expectations theory suggests that short-term interest rates are expected to fall. \’) 3) the segmented markets theory suggests that short-term interest rates are expected to fall. ) 4) the expectations theory suggests that short-term interest rates are expected to rise.

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Question 27 (1 point) Saved During a "flight to quality" ~ — 1) the change in the spread between Aaa and Baa bonds cannot be predicted. 2) junk bonds become more attractive to investors. (@ (®)3) the spread between Aaa and Baa bonds increases. O 4) the spread between Aaa and Baa bonds is not affected. O 5) the spread between Aaa and Baa bonds decreases. Question 28 (1 point) Saved The risk premium on corporate bonds rises when M\ L)1) the Treasury bond market becomes less liquid. ~ ® 2) a flurry of major corporate bankruptcies occurs. ) L . J3) brokerage commissions fall in the corporate bond market. ) L 4) any of the above occurs.

Question 29 (1 point) Saved If income tax rates were lowered, then VY L/ 1) the interest rate on municipal bonds would rise. ~ L 2) the interest rate on Treasury bonds would fall. 'Y L 3) the interest rate on municipal bonds would fall. ~ (®) 4) hoth A and B would occur. VY -/ 5) both B and C would occur. Question 30 (1 point) Saving.. & A particularly attractive feature of the ________ is that it tells you what the market is predicting about future short-term interest rates by just looking at the slope of the yield curve. @ 1) liquidity premium theory N (2 segmented markets theory O A 3) expectations theory J 4) both A and B of the above

Question 31 (1 point) Saved According to the expectations theory of the term structure O 1) 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. O 7 2) interest rates on bonds of different maturities move together over time. O) J3) buyers of bonds prefer short-term to long-term bonds. ) -/ 4) all of the above. @ 5) only A and B of the above. Question 32 (1 point) Saved Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1 percent. The expectations theory of the term structure predicts that the current interest rate on 3-year bond is O 5 percent. 2) 4 percent. e \J3)3 percent. @) &) 4) o percent. (s) g percent.

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Question 33 (1 point) Saved True or false? According to the liquidity premium theory of term structure, buyers of bonds prefer short-term to long-term bonds. Question 34 (1 point) Saved The risk premium on corporate bonds becomes smaller if @ 1) the liquidity of corporate bonds increases. Y L 2) the liquidity of corporate bonds decreases. ‘\) 3) the riskiness of corporate bonds increases. O) -/ 4) both A and C occur.

Question 35 (1 point) Saved According to the expectations theory of the term structure ®1 ) interest rates on bonds of different maturities move together over time. () 2) 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. s \) 3) buyers of bonds prefer short-term to long-term bonds. - \D 4) all of the above. s \—D 5) only A and B of the above. Question 36 (1 point) Saved The spread between interest rates on low quality corporate bonds and U.S. government bonds /Y LJ1) narrowed moderately during the Great Depression. ‘;—> 2) did not change during the Great Depression. - '/ 3) narrowed significantly during the Great Depression. ®© 4) widened significantly during the Great Depression.

Question 37 (1 point) Saved According to the liquidity premium theory of the term structure, a steeply upward sloping yield curve indicates that @ 1) short-term interest rates are expected to rise in the future. E ( N N 7 2) short-term interest rates are expected to remain unchanged in the future. O) . N . L) 3) short-term interest rates are expected to decline moderately in the future. ) N N . L 4) short-term interest rates are expected to decline sharply in the future. Question 38 (1 point) Saved Which of the following long-term bonds has the highest interest rate? P Oy U.S. Treasury bonds O2 Corporate Aa bonds oy J3) Corporate Aaa bonds (®) & 4) Corporate Baa bonds

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Question 39 (1 point) Saved According to the expectations theory of the term structure O 1) interest rates on bonds of different maturities do not move together over time. (5) 2) 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. ) 3) buyers of bonds do prefer short-term to long-term bonds. ~ L/ 4) all of the above. Question 40 (1 point) Saved According to the liquidity premium theory @ 72 downward sloping yield curve indicates that short-term interest rates are expected to fall sharply in the future. O 2) a flat yield curve indicates that short-term interest rates are expected to rise moderately in the near future, then fall moderately in the distant future. () 32 moderately rising yield curve indicates that short-term interest rates are expected rise moderately in the future. O 4) 2 steeply rising yield curve indicates that short-term interest rates are expected to remain unchanged in the future.

Question 41 (1 point) Saving.. & When yield curves are flat, O 1) medium-term interest rates are below both short-term and long-term interest rates. e\ '/ 2) |ong-term interest rates are above short-term interest rates. @ 3) short-term interest rates are about the same as long-term interest rates. () 2) medium-term interest rates are above both short-term and long-term interest rates. M L) '5) short-term interest rates are above long-term interest rates. Question 42 (1 point) Saved If the yield curve has a mild upward slope, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting O 1) 2 decline in short-term interest rates in the near future and a rise further out in the future. O )2 rise in short-term interest rates in the near future and a decline further out in the future. (6) 3) constant short-term interest rates in the near future and further out in the ) future. \/\ 4) a decline in short-term interest rates in the near future and an even steeper decline further out in the future.

Question 43 (1 point) Saved The interest rate on municipal bonds falls relative to the interest rate on Treasury securities when Y @) 1) income tax rates are raised. ) . . . (' 2) thereis a major default in the municipal bond market. . L 3) corporate bonds become riskier. 4) municipal bonds become less widely traded. p \) 5) none of the above occur. Question 44 (1 point) Saved Municipal bonds have default risk, yet their interest rates are lower than the rates on default-free Treasury bonds. This suggests that (6) 1) the benefit from the tax-exempt status of municipal bonds exceeds their default risk. O 2) the benefit from the tax-exempt status of municipal bonds is less than their default risk. (\/\ 3) the benefit from the tax-exempt status of municipal bonds equals their ~ default risk. O L 4) Treasury bonds are not default-free. O 5) both C and D above are correct.

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Question 45 (1 point) Saved When the yield curve slopes down, O 1) the expectations theory suggests that short-term interest rates are expected to rise. O 2) the liquidity premium theory suggests that short-term interest rates are expected to rise. /\/\ 3) the segmented markets theory suggests that short-term interest rates are i expected to rise. @ 4) the expectations theory suggests that short-term interest rates are expected to fall. UesLon 40 (1 pointg) Saveu When yield curves are steeply upward sloping, (o) . q @) long-term interest rates are above short-term interest rates. P ‘\’) 2) medium-term interest rates are above both short-term and long-term interest rates. - ) . f /) 3) short-term interest rates are above long-term interest rates. ’) 2) medium-term interest rates are below both short-term and long-term interest rates. ) 5) . . ) short-term interest rates are about the same as long-term interest rates.

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Question 47 (1 point) Saved According to the expectations theory of the term structure ~ 1) buyers of bonds do not prefer bonds of one maturity over another. e\ ) 2) yield curves should be as equally likely to slope downward as slope upward. (\”j 3) the interest rate on long-term bonds will equal an average of short-term i interest rates that people expect to occur over the life of the long-term bonds. Py () 4) all of the above. N J'5) only A and B of the above. Question 48 (1 point) Saving.. & If the tax-exempt status of municipal bonds were eliminated, then /’\) 1) the interest rates on municipal, Treasury, and corporate bonds would all N decrease. @ 2) the interest rate on municipal bonds would exceed the rate on Treasury bonds. O 3) the interest rate on municipal bonds would equal the rate on Treasury bonds. ("/\ 4) the interest rates on municipal, Treasury, and corporate bonds would all increase. \) 5) the interest rates on municipal bonds would still be less than the interest ) rate on Treasury bonds.

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Question 49 (1 point) Saved True or false? According to the segmented market theory of term structure, yield curves should be as equally likely to slope downward as slope upward. e O 1) Tre. N\ (®)2) False. Question 50 (1 point) Saved According to the segmented markets theory of the term structure I /1) buyers of bonds do not prefer bonds of one maturity over another. O 2) 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. (5) 3) interest rates on bonds of different maturities do not move together over © time. 0 / 4) all of the above.

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Question 51 (1 point) Saved According to the expectations theory of the term structure () buyers of bonds do not prefer bonds of one maturity over another. O 2) 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. I ) 3) interest rates on bonds of different maturities move together over time. (®)4) al| of the above. O 5) only A and B of the above. Question 52 (1 point) Saving.. & True or false? The expectations theory cannot explain the fact that yield curves usually slope upward because it implies that there is no relationship between long- term and short-term interest rates. Ve N / 1) True. ® 2) Faise.

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Question 53 (1 point) Saved A decrease in marginal tax rates would likely have the effectof ________ the demand for municipal bonds, and ________ the demand for U.S. government bonds. @ 1) decreasing; increasing N O 2) increasing; increasing ) . N LJ3) decreasing; decreasing O U 4) increasing; decreasing Question 54 (1 point) Saved True or false? According to the expectations theory of term structure, the expected return of the three-year bond should be equal to the expected return from buying three one-year bonds today. ~ 1) True. 5\ ® 2) False.

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Question 55 (1 point) Saved If the yield curve slope is flat, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting O 1) 2 mild rise in short-term interest rates in the near future and a mild decline further out in the future. O 2) constant short-term interest rates in the near future and a mild decline further out in the future. (3) 3) a mild decline in short-term interest rates in the near future and a continuing mild decline further out in the future. O 4) constant short-term interest rates in the near future and further out in the ) future. Question 56 (1 point) Saved When yield curves are downward sloping, ™ L 1) short-term interest rates are about the same as long-term interest rates. O 2) medium-term interest rates are above both short-term and long-term interest rates. O 3) medium-term interest rates are below both short-term and long-term interest rates. ) L 4) long-term interest rates are above short-term interest rates. =~ @) 5) short-term interest rates are above long-term interest rates.

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Question 57 (1 point) Saved According to the expectations theory of the term structure (\) 1) when the yield curve is downward sloping, short-term interest rates are expected to decline in the future. O) U/ 2) when the yield curve is steeply upward sloping, short-term interest rates are expected to rise in the future. O) /) 3) buyers of bonds do not prefer bonds of one maturity over another. ® 4) all of the above. ~ L5 only A and B of the above. The inverted U-shaped yield curve in Figure 6-3 indicates that Figure 6-3 ‘(,\/ 1) short-term interest rates are expected to fall moderately in the near-term and rise later on. O 2) short-term interest rates are expected to fall sharply in the near-term and rise later on. @ 3) short-term interest rates are expected to rise in the near-term and fall later on. \/\ 4) short-term interest rates are expected to remain unchanged in the near- term and fall later on.

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Question 59 (1 point) Saved According to the segmented markets theory of the term structure ( '> 1) investors' strong preferences for short-term relative to long-term bonds explains why yield curves typically slope upward. ( ) 2) 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. () 3) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. @ 4) all of the above. o~ ( O 5) none of the above. Question 60 (1 point) Saved Which of the following statements are true? () 1) The expected return on corporate bonds decreases as default risk decreases. @ 2) As their relative riskiness increases, the expected return on corporate bonds decreases relative to the expected return on default-free bonds. C) 3) An increase in default risk on corporate bonds decreases the demand for default-free bonds. () 4) A corporate bond's return becomes more uncertain as default risk decreases. Wrongs

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Question 31 (1 point) Saved (\") 1) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. (\' '> 2) 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. r/_ ( \ > 3) investors' strong preferences for short-term relative to long-term bonds explains why yield curves typically slope downward. ® ®/'4) only A and B of the above. corrected Question 30 A particularly attractive feature of the by just looking at the slope of the yield curve. 1) liquidity premium theory 2) segmented markets theory 3) expectations theory 4) both A and B of the above LPT is correct online is that it tells you what the market is predicting about future short-term interest rates

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Question 25 (1 point) Saved | is that it tells you what the market is predicting about future short-term interest rates by just looking at the slope of the yield curve. ~ O 1) liquidity premium theory )2 segmented markets theory @ 3) expectations theory ~ O 4 both A and B of the above But in quiz Expectations theory is correct

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Quiz 6, Chapter 6

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