Question 1

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 2

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 3

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.

Question 4

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

Eliminating the tax-exempt status of municipal bonds would result in a decrease in demand for these bonds, as investors would no longer receive the tax benefit. This decrease in demand would lead to an increase in the interest rate on municipal bonds, making them less appealing compared to Treasury bonds. Therefore, the interest rate on municipal bonds would exceed the rate on Treasury bonds. The interest rates on corporate bonds may or may not be affected by this change.

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

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...

Question 7

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 lead to an increase in demand for municipal bonds as investors seek tax-free alternatives. This increase in demand for municipal bonds would result in a decrease in the interest rates on those bonds.

Question 8

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 9

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

The answer of An increase in the liquidity of corporate...

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

A decrease in the liquidity of corporate bonds makes them less attractive to investors, leading to an increase in their yield as investors demand a higher return for the added liquidity risk. Conversely, Treasury bonds, being more liquid, become relatively more attractive, potentially decreasing their yield as demand for them increases.

Question 11

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 12

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 municipal bonds have lower interest rates than Treasury bonds despite having some default risk suggests that investors believe the benefit from the tax-exempt status of municipal bonds exceeds their default risk. This is because the tax-exempt status of municipal bonds can provide a significant boost to after-tax returns, offsetting the default risk and making them a more attractive investment option for many investors.

Question 13

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 14

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 15

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 16

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 17

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 18

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

A decrease in the liquidity of corporate bonds would make them less desirable to hold, therefore decreasing the demand for them and shifting their demand curve to the left. As a result, investors would likely shift their demand towards the more liquid and safer Treasury bonds, shifting their demand curve to the right.

Question 19

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 20

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 top income tax bracket makes municipal bonds, which are tax-exempt, more attractive to high-income investors, leading to lower yields (or interest rates) on these bonds due to increased demand. Conversely, Treasury bonds, which are subject to federal taxes, become relatively less attractive, leading to decreased demand and higher yields (or interest rates) to attract buyers.

Quiz 6: The Risk and Term Structure of Interest Rates

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

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?

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

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.

Which of the following statements are TRUE?

Everything else held constant,abolishing the individual income tax will

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

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

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.

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

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.

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

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,other things being equal,shifts the demand curve for corporate bonds to the and the demand curve for Treasury bonds shifts to the .

Three factors explain the risk structure of interest rates

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.

Quiz 6: The Risk and Term Structure of Interest Rates

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

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?

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

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.

Which of the following statements are TRUE?

Everything else held constant,abolishing the individual income tax will

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

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

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.

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

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.

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

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,other things being equal,shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________.

Three factors explain the risk structure of interest rates

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.

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

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

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.

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.

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,other things being equal,shifts the demand curve for corporate bonds to the and the demand curve for Treasury bonds shifts to the .

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.