Question 1

The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and are ________ U.S.Treasury bonds.
A)less liquid than
B)less speculative than
C)tax-exempt unlike
D)lower-yielding than

Accepted Answer

Corporate bonds are generally considered less liquid than U.S. Treasury bonds, which are backed by the full faith and credit of the U.S. government, making them one of the most liquid investments in the world. This liquidity difference is a key factor in the risk premium associated with corporate bonds.

Question 2

Everything else held constant,an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds,and ________ the demand for U.S.government bonds.
A)increasing;increasing
B)increasing;decreasing
C)decreasing;increasing
D)decreasing;decreasing

Accepted Answer

An increase in marginal tax rates makes tax-exempt securities, such as municipal bonds, more attractive, thus increasing their demand. Conversely, the demand for taxable bonds, like U.S. government bonds, would decrease as investors seek to minimize their tax burden.

Question 3

Everything else held constant,if income tax rates were lowered,then
A)the interest rate on municipal bonds would fall.
B)the interest rate on Treasury bonds would rise.
C)the interest rate on municipal bonds would rise.
D)the price of Treasury bonds would fall.

Accepted Answer

Lowering income tax rates makes the tax-exempt status of municipal bonds less attractive, reducing their demand and causing their interest rates to rise to attract investors.

Question 4

The Obama administration increased the tax on the top income tax bracket from 35% to 39%.Supply and demand analysis predicts the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds,all else the same.
A)higher;lower
B)lower;lower
C)higher;higher
D)lower;higher

Accepted Answer

The increase in the tax on the top income tax bracket reduces the after-tax return on municipal bonds, making them less attractive to investors, which decreases the demand for municipal bonds, and thus leads to a higher interest rate. On the other hand, the increase in the tax rate on the top income tax bracket increases the after-tax return on Treasury bonds, making them more attractive to investors, which increases the demand for Treasury bonds and thus leads to a lower interest rate. Therefore, the correct answer is D, lower interest rate on municipal bonds and higher interest rate on Treasury bonds, all else the same.

Question 5

If the federal government where to raise the income tax rates,would this have any impact on a state's cost of borrowing funds? Explain.

Accepted Answer

The answer of If the federal government where to raise...

Question 6

Everything else held constant,a decrease in marginal tax rates would likely have the effect of ________ the demand for municipal bonds,and ________ the demand for U.S.government bonds.
A)increasing;increasing
B)increasing;decreasing
C)decreasing;increasing
D)decreasing;decreasing

Accepted Answer

The answer of Everything else held constant,a decrease in marginal...

Question 7

An increase in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield of Treasury bonds,everything else held constant.
A)increase;increase
B)reduce;reduce
C)increase;reduce
D)reduce;increase

Accepted Answer

An increase in the liquidity of corporate bonds would increase the demand for those bonds, leading to an increase in their price. As a result, investors may shift to other investments such as Treasury bonds, which would decrease their demand and increase their yield. Therefore, the price of corporate bonds would increase and the yield of Treasury bonds would increase as well.

Question 8

When the Treasury bond market becomes less 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

Accepted Answer

When the Treasury bond market becomes less liquid, investors may find corporate bonds more attractive, shifting the demand curve for corporate bonds to the right. Conversely, the demand for Treasury bonds would decrease, shifting their demand curve to the left.

Question 9

Three factors explain the risk structure of interest rates
A)liquidity,default risk,and the income tax treatment of a security.
B)maturity,default risk,and the income tax treatment of a security.
C)maturity,liquidity,and the income tax treatment of a security.
D)maturity,default risk,and the liquidity of a security.

Accepted Answer

The answer of Three factors explain the risk structure of...

Question 10

A decrease in the liquidity of corporate bonds will ________ the yield of corporate bonds and ________ the yield of Treasury bonds,everything else held constant.
A)increase;increase
B)decrease;decrease
C)increase;decrease
D)decrease;increase

Accepted Answer

When the liquidity of corporate bonds decreases, investors will demand a higher yield to compensate for the increased risk associated with buying a less liquid asset. Therefore, the yield of corporate bonds will increase. On the other hand, Treasury bonds are considered to be the safest and most liquid investment, so their yield is less affected by changes in liquidity. As a result, the yield of Treasury bonds will decrease relative to the yield of corporate bonds, creating a wider yield spread between the two bond types.

Question 11

An increase in the liquidity of corporate bonds,other things being equal,shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________.
A)right;right
B)right;left
C)left;left
D)left;right

Accepted Answer

An increase in the liquidity of corporate bonds makes them more attractive to investors, shifting the demand curve for corporate bonds to the right as they are now more desirable. This increased attractiveness of corporate bonds can make Treasury bonds less appealing in comparison, potentially shifting the demand curve for Treasury bonds to the left as investors may prefer the now more liquid corporate bonds over Treasury bonds.

Question 12

Which of the following statements is TRUE?
A)State and local governments cannot default on their bonds.
B)Bonds issued by state and local governments are called municipal bonds.
C)All government issued bonds-local,state,and federal-are federal income tax exempt.
D)The coupon payment on municipal bonds is usually higher than the coupon payment on Treasury bonds.

Accepted Answer

Bonds issued by state and local governments are called municipal bonds. A is false because state and local governments can default on their bonds. C is false because not all government issued bonds are federal income tax exempt, it depends on the type of bond and the purpose for which it was issued. D is false because municipal bonds usually have lower coupon payments than Treasury bonds.

Question 13

A decrease in the liquidity of corporate bonds,other things being equal,shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________.
A)right;right
B)right;left
C)left;left
D)left;right

Accepted Answer

When the liquidity of corporate bonds decreases, investors may shift their demand to more liquid Treasury bonds, leading to a decrease in demand for corporate bonds and an increase in demand for Treasury bonds. This causes the demand curve for corporate bonds to shift to the left and the demand curve for Treasury bonds to shift to the right.

Question 14

Everything else held constant,if the tax-exempt status of municipal bonds were eliminated,then
A)the interest rates on municipal bonds would still be less than the interest rate on Treasury bonds.
B)the interest rate on municipal bonds would equal the rate on Treasury bonds.
C)the interest rate on municipal bonds would exceed the rate on Treasury bonds.
D)the interest rates on municipal,Treasury,and corporate bonds would all increase.

Accepted Answer

The tax-exempt status of municipal bonds is a major factor in their appeal to investors. Without this benefit, the interest rates on municipal bonds would increase to compensate for the loss of tax advantages. This would cause the interest rate on municipal bonds to exceed the rate on Treasury bonds.

Question 15

The spread between the interest rates on Baa corporate bonds and U.S.government bonds is very large during the Great Depression years 1930-1933.Explain this difference using the bond supply and demand analysis.

Accepted Answer

The answer of The spread between the interest rates on...

Question 16

A(n)________ in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds,all else equal.
A)increase;increase;decrease
B)increase;decrease;decrease
C)decrease;increase;increase
D)decrease;decrease;decrease

Accepted Answer

The answer of A(n)________ in the liquidity of corporate bonds...

Question 17

Everything else held constant,abolishing the individual income tax will
A)increase the interest rate on corporate bonds.
B)reduce the interest rate on municipal bonds.
C)increase the interest rate on municipal bonds.
D)increase the interest rate on Treasury bonds.

Accepted Answer

Abolishing the individual income tax would decrease the supply of municipal bonds since states and municipalities rely on income tax revenue to finance their projects. With less supply of municipal bonds, investors would demand a higher interest rate to purchase them, hence increasing the interest rate on municipal bonds.

Question 18

Everything else held constant,the interest rate on municipal bonds rises relative to the interest rate on Treasury securities when
A)income tax rates are lowered.
B)income tax rates are raised.
C)municipal bonds become more widely traded.
D)corporate bonds become riskier.

Accepted Answer

When income tax rates are lowered, the tax-exempt status of municipal bonds becomes less valuable, leading investors to demand higher interest rates relative to taxable bonds like Treasury securities to compensate for the lower tax advantage.

Question 19

Municipal bonds have default risk,yet their interest rates are lower than the rates on default-free Treasury bonds.This suggests that
A)the benefit from the tax-exempt status of municipal bonds is less than their default risk.
B)the benefit from the tax-exempt status of municipal bonds equals their default risk.
C)the benefit from the tax-exempt status of municipal bonds exceeds their default risk.
D)Treasury bonds are not default-free.

Accepted Answer

The fact that the interest rates on municipal bonds are lower than Treasury bonds suggests that the benefit from the tax-exempt status of municipal bonds exceeds their default risk. Investors are willing to accept a lower interest rate to benefit from the tax-exempt status, which outweighs the default risk.

Question 20

Which of the following statements are TRUE?
A)An increase in tax rates will increase the demand for Treasury bonds,lowering their interest rates.
B)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.
C)Interest rates on municipal bonds will be higher than comparable bonds without the tax exemption.
D)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.

Accepted Answer

The answer of Which of the following statements are TRUE?
A)An...

Quiz 6: The Risk and Term Structure of Interest Rates

The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and are ________ U.S.Treasury bonds.

Everything else held constant,an increase in marginal tax rates would likely have the effect of the demand for municipal bonds,and the demand for U.S.government bonds.

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

The Obama administration increased the tax on the top income tax bracket from 35% to 39%.Supply and demand analysis predicts the impact of this change was a interest rate on municipal bonds and a interest rate on Treasury bonds,all else the same.

If the federal government where to raise the income tax rates,would this have any impact on a state's cost of borrowing funds? Explain.

Everything else held constant,a decrease in marginal tax rates would likely have the effect of the demand for municipal bonds,and the demand for U.S.government bonds.

An increase in the liquidity of corporate bonds will the price of corporate bonds and the yield of Treasury bonds,everything else held constant.

When the Treasury bond market becomes less liquid,other things equal,the demand curve for corporate bonds shifts to the and the demand curve for Treasury bonds shifts to the .

Three factors explain the risk structure of interest rates

A decrease in the liquidity of corporate bonds will the yield of corporate bonds and the yield of Treasury bonds,everything else held constant.

An increase in the liquidity of corporate bonds,other things being equal,shifts the demand curve for corporate bonds to the and the demand curve for Treasury bonds shifts to the .

Which of the following statements is TRUE?

A decrease in the liquidity of corporate bonds,other things being equal,shifts the demand curve for corporate bonds to the and the demand curve for Treasury bonds shifts to the .

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

The spread between the interest rates on Baa corporate bonds and U.S.government bonds is very large during the Great Depression years 1930-1933.Explain this difference using the bond supply and demand analysis.

A(n) in the liquidity of corporate bonds will the price of corporate bonds and the yield on corporate bonds,all else equal.

Everything else held constant,abolishing the individual income tax will

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

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

Which of the following statements are TRUE?

Quiz 6: The Risk and Term Structure of Interest Rates

The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and are ________ U.S.Treasury bonds.

Everything else held constant,an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds,and ________ the demand for U.S.government bonds.

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

The Obama administration increased the tax on the top income tax bracket from 35% to 39%.Supply and demand analysis predicts the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds,all else the same.

If the federal government where to raise the income tax rates,would this have any impact on a state's cost of borrowing funds? Explain.

Everything else held constant,a decrease in marginal tax rates would likely have the effect of ________ the demand for municipal bonds,and ________ the demand for U.S.government bonds.

An increase in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield of Treasury bonds,everything else held constant.

When the Treasury bond market becomes less liquid,other things equal,the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.

Three factors explain the risk structure of interest rates

A decrease in the liquidity of corporate bonds will ________ the yield of corporate bonds and ________ the yield of Treasury bonds,everything else held constant.

An increase in the liquidity of corporate bonds,other things being equal,shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________.

Which of the following statements is TRUE?

A decrease in the liquidity of corporate bonds,other things being equal,shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________.

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

The spread between the interest rates on Baa corporate bonds and U.S.government bonds is very large during the Great Depression years 1930-1933.Explain this difference using the bond supply and demand analysis.

A(n) ________ in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds,all else equal.

Everything else held constant,abolishing the individual income tax will

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

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

Which of the following statements are TRUE?

Everything else held constant,an increase in marginal tax rates would likely have the effect of the demand for municipal bonds,and the demand for U.S.government bonds.

The Obama administration increased the tax on the top income tax bracket from 35% to 39%.Supply and demand analysis predicts the impact of this change was a interest rate on municipal bonds and a interest rate on Treasury bonds,all else the same.

Everything else held constant,a decrease in marginal tax rates would likely have the effect of the demand for municipal bonds,and the demand for U.S.government bonds.

An increase in the liquidity of corporate bonds will the price of corporate bonds and the yield of Treasury bonds,everything else held constant.

When the Treasury bond market becomes less liquid,other things equal,the demand curve for corporate bonds shifts to the and the demand curve for Treasury bonds shifts to the .

A decrease in the liquidity of corporate bonds will the yield of corporate bonds and the yield of Treasury bonds,everything else held constant.

An increase in the liquidity of corporate bonds,other things being equal,shifts the demand curve for corporate bonds to the and the demand curve for Treasury bonds shifts to the .

A decrease in the liquidity of corporate bonds,other things being equal,shifts the demand curve for corporate bonds to the and the demand curve for Treasury bonds shifts to the .

A(n) in the liquidity of corporate bonds will the price of corporate bonds and the yield on corporate bonds,all else equal.