Question 1

The collapse of the subprime mortgage market

Accepted Answer

The collapse of the subprime mortgage market increased the perceived riskiness of the overall credit markets, including corporate bonds. As a result, investors demanded higher yields on riskier bonds, leading to an increase in the Baa-Aaa spread.

Question 2

Bonds with relatively high risk of default are called

Accepted Answer

Junk bonds are bonds that have a high risk of default, and therefore carry a higher yield to compensate for this risk. They are also known as speculative bonds or high yield bonds. Brady bonds are bonds issued by developing countries that have been restructured and are seen as less risky than traditional junk bonds. Zero coupon bonds are bonds that do not pay interest, but are sold at a discount and pay out the face value at maturity. Investment grade bonds are bonds that have a lower risk of default and are considered safer investments.

Question 3

Which of the following statements is TRUE?

Accepted Answer

A liquid asset is defined as an asset that can be quickly and easily converted into cash without significant price discounts.

Question 4

Everything else held constant,if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future,the interest rate on corporate bonds will ________ and the interest rate on Treasury securities will ________.

Accepted Answer

If the federal government were to guarantee that it will pay creditors if a corporation goes bankrupt in the future, it would decrease the perceived risk of investing in corporate bonds. This would lead to a decrease in the interest rate on corporate bonds. However, it would also increase the demand for Treasury securities as they are perceived as safer investments. This would lead to an increase in the interest rate on Treasury securities.

Question 5

Risk premiums on corporate bonds tend to ________ during business cycle expansions and ________ during recessions,everything else held constant.

Accepted Answer

Risk premiums on corporate bonds tend to decrease during business cycle expansions due to lower perceived risk and increase during recessions due to higher perceived risk.

Question 6

Corporate bonds are not as liquid as government bonds because

Accepted Answer

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. This means that there are fewer buyers and sellers in the market, which can result in wider bid-ask spreads and less trading volume. As a result, investors may find it more difficult to buy or sell corporate bonds when they need to, making them less liquid than government bonds.

Question 7

During a "flight to quality"

Accepted Answer

During a "flight to quality," investors move their money into safer assets, such as Treasury bonds, which are considered risk-free. This increased demand for Treasuries lowers their yields, while the yields on riskier bonds, like Baa-rated corporate bonds, increase due to decreased demand. As a result, the spread between Treasury bonds and Baa bonds widens.

Question 8

Which of the following bonds would have the highest default risk?

Accepted Answer

Junk bonds have the highest default risk among the options given. They are high-yield bonds that are issued by companies with lower credit ratings, making them riskier than investment-grade bonds or Treasury bonds. Municipal bonds generally have lower default risk than junk bonds as they are backed by local governments, but their risk level can vary depending on the financial health of the issuing municipality.

Question 9

During the Great Depression years 1930-1933 there was a very high rate of business failures and defaults,we would expect the risk premium for ________ bonds to be very high.

Accepted Answer

During the Great Depression years 1930-1933, the risk of default for corporate bonds (especially lower-rated bonds like Baa) was very high due to the high rate of business failures. Therefore, the risk premium for corporate Baa bonds would be very high. The other options (US Treasury, corporate Aaa, and municipal) would not have experienced the same level of default risk during this time period.

Question 10

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

Accepted Answer

During the Great Depression, the spread between interest rates on low quality corporate bonds and U.S. government bonds widened significantly. This was due to the increasing risk of default by corporations as a result of the economic downturn.

Question 11

As default risk decreases,the expected return on corporate bonds ________,and the return becomes ________ uncertain,everything else held constant.

Accepted Answer

As default risk decreases, investors demand lower returns which causes the expected return on corporate bonds to increase. However, with lower risk, the return becomes less uncertain which means the bond price becomes more stable, resulting in less variability in the return.

Question 12

Which of the following securities has the lowest interest rate?

Accepted Answer

U.S. Treasury bonds typically have the lowest interest rates because they are considered the safest investment and therefore have the lowest risk. Junk bonds and corporate Baa bonds have higher interest rates because they are considered riskier investments. Investment-grade bonds typically have higher interest rates than Treasury bonds but lower than junk bonds or corporate Baa bonds.

Question 13

The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S. Treasury bonds. This is due to

Accepted Answer

The collapse of the subprime mortgage market led investors to lose faith in risky investments, causing a "flight to quality," where they sought safer investments such as default-free U.S. Treasury bonds. This increased the demand for Treasury bonds, causing their prices to rise and their yields to fall, resulting in a wider spread between Baa bonds (which have higher risk of default) and Treasury bonds.

Question 14

Bonds with relatively low risk of default are called ________ securities and have a rating of Baa (or BBB)and above;bonds with ratings below Baa (or BBB)have a higher default risk and are called ________.

Accepted Answer

Bonds with relatively low risk of default are called investment grade securities and have a rating of Baa (or BBB) and above. Bonds with ratings below Baa (or BBB) have a higher default risk and are referred to as junk bonds.

Question 15

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

Accepted Answer

Corporate Baa bonds typically have higher interest rates than U.S. Treasury bonds and municipal bonds due to their higher default risk. Corporate Aaa bonds usually have lower interest rates than Baa bonds due to their lower default risk.

Question 16

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 ________.

Accepted Answer

When the Treasury bond market becomes more liquid, investors are more willing to hold Treasury bonds because they are easier to buy and sell. This increases the demand for Treasury bonds, shifting the demand curve to the right. At the same time, the increased liquidity of the Treasury bond market makes corporate bonds relatively less attractive, reducing the demand for corporate bonds and shifting the demand curve to the left. Therefore, the correct choice is (C) left; right.

Question 17

Junk bonds,bonds with a low bond rating,are also known as

Accepted Answer

Junk bonds often offer a high yield (rate of return) to compensate for their higher risk due to their low rating. High-yield bonds are also sometimes called speculative or non-investment grade bonds. B) investment grade bonds and C) high-quality bonds are the opposite of junk bonds, indicating high creditworthiness and a lower risk of default. D) Zero-coupon bonds are a type of bond that does not pay interest regularly, but is sold at a discount and redeemed at face value at maturity.

Question 18

As their relative riskiness ________,the expected return on corporate bonds ________ relative to the expected return on default-free bonds,everything else held constant.

Accepted Answer

As the relative riskiness of corporate bonds increases, investors demand a higher expected return to compensate for the higher risk. This causes the expected return on corporate bonds to increase relative to the expected return on default-free bonds. Therefore, choice B is the correct answer.

Question 19

Which of the following statements are TRUE?

Accepted Answer

The answer of Which of the following statements are TRUE?
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Question 20

If you have a very low tolerance for risk,which of the following bonds would you be least likely to hold in your portfolio?

Accepted Answer

Of the options given, a corporate bond with a rating of Baa represents the highest risk due to its lower credit rating. Therefore, if you have a very low tolerance for risk, you would be least likely to hold this bond in your portfolio. A U.S. Treasury bond is considered the lowest risk as it is backed by the full faith and credit of the U.S. government. A municipal bond also has lower risk as it is issued by a state or local government and is typically used for financing public projects. A corporate bond with a rating of Aaa represents a slightly higher level of risk compared to a U.S. Treasury bond or municipal bond but is still considered investment-grade and relatively low risk.

Quiz 6: The Risk and Term Structure of Interest Rates

The collapse of the subprime mortgage market

Bonds with relatively high risk of default are called

Which of the following statements is TRUE?

Everything else held constant,if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future,the interest rate on corporate bonds will and the interest rate on Treasury securities will .

Risk premiums on corporate bonds tend to during business cycle expansions and during recessions,everything else held constant.

Corporate bonds are not as liquid as government bonds because

During a "flight to quality"

Which of the following bonds would have the highest default risk?

During the Great Depression years 1930-1933 there was a very high rate of business failures and defaults,we would expect the risk premium for ________ bonds to be very high.

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

As default risk decreases,the expected return on corporate bonds ,and the return becomes uncertain,everything else held constant.

Which of the following securities has the lowest interest rate?

The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S. Treasury bonds. This is due to

Bonds with relatively low risk of default are called securities and have a rating of Baa (or BBB) and above;bonds with ratings below Baa (or BBB) have a higher default risk and are called .

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

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 .

Junk bonds,bonds with a low bond rating,are also known as

As their relative riskiness ,the expected return on corporate bonds relative to the expected return on default-free bonds,everything else held constant.

Which of the following statements are TRUE?

If you have a very low tolerance for risk,which of the following bonds would you be least likely to hold in your portfolio?

Quiz 6: The Risk and Term Structure of Interest Rates

The collapse of the subprime mortgage market

Bonds with relatively high risk of default are called

Which of the following statements is TRUE?

Everything else held constant,if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future,the interest rate on corporate bonds will ________ and the interest rate on Treasury securities will ________.

Risk premiums on corporate bonds tend to ________ during business cycle expansions and ________ during recessions,everything else held constant.

Corporate bonds are not as liquid as government bonds because

During a "flight to quality"

Which of the following bonds would have the highest default risk?

During the Great Depression years 1930-1933 there was a very high rate of business failures and defaults,we would expect the risk premium for ________ bonds to be very high.

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

As default risk decreases,the expected return on corporate bonds ________,and the return becomes ________ uncertain,everything else held constant.

Which of the following securities has the lowest interest rate?

The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S. Treasury bonds. This is due to

Bonds with relatively low risk of default are called ________ securities and have a rating of Baa (or BBB) and above;bonds with ratings below Baa (or BBB) have a higher default risk and are called ________.

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

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 ________.

Junk bonds,bonds with a low bond rating,are also known as

As their relative riskiness ________,the expected return on corporate bonds ________ relative to the expected return on default-free bonds,everything else held constant.

Which of the following statements are TRUE?

If you have a very low tolerance for risk,which of the following bonds would you be least likely to hold in your portfolio?

Everything else held constant,if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future,the interest rate on corporate bonds will and the interest rate on Treasury securities will .

Risk premiums on corporate bonds tend to during business cycle expansions and during recessions,everything else held constant.

As default risk decreases,the expected return on corporate bonds ,and the return becomes uncertain,everything else held constant.

Bonds with relatively low risk of default are called securities and have a rating of Baa (or BBB) and above;bonds with ratings below Baa (or BBB) have a higher default risk and are called .

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 .

As their relative riskiness ,the expected return on corporate bonds relative to the expected return on default-free bonds,everything else held constant.