Question 1

As a result of the subprime collapse,the demand for low -quality corporate bonds ________,the demand for high-quality Treasury bonds ________,and the risk spread ________.
A) increased; decreased; was unchanged
B) decreased; increased; increased
C) increased; decreased; decreased
D) decreased; increased; was unchanged

Accepted Answer

The subprime collapse led to a decrease in demand for low-quality corporate bonds as investors sought safer investments, increasing the demand for high-quality Treasury bonds. This shift also widened the risk spread between low-quality and high-quality bonds.

Question 2

If a corporation begins to suffer large losses,then the default risk on its bonds will ________ and the equilibrium interest rate on these bonds will ________.
A) increase; decrease
B) decrease; increase
C) increase; increase
D) decrease; decrease

Accepted Answer

When a corporation begins to suffer large losses, its default risk increases because it becomes less likely to meet its debt obligations. As a result, investors will demand a higher interest rate to compensate for this increased risk, leading to an increase in the equilibrium interest rate on these bonds.

Question 3

A corporation suffering big losses might be more likely to suspend interest payments on its bonds,thereby
A) raising the default risk and causing the demand for its bonds to rise.
B) raising the default risk and causing the demand for its bonds to fall.
C) lowering the default risk and causing the demand for its bonds to rise.
D) lowering the default risk and causing the demand for its bonds to fall.

Accepted Answer

If a corporation suspends interest payments on its bonds, this means that it is not meeting its financial obligations to bondholders. As a result, the default risk of the corporation increases, which makes investors less willing to hold its bonds. This leads to a decrease in the demand for its bonds, and therefore a decrease in their price.

Question 4

When the default risk on corporate bonds decreases,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; left
D) left; right

Accepted Answer

When the default risk on corporate bonds decreases, investors find corporate bonds more attractive, leading to an increase in demand for corporate bonds (shift to the right) and a decrease in demand for comparatively safer Treasury bonds (shift to the left), as investors switch from Treasuries to corporate bonds.

Question 5

(I)If a corporation suffers big losses,the demand for its bonds will rise because of the higher interest rates the firm must pay.
(II)The spread between the interest rates on bonds with default risk and default-free bonds is called the risk premium.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.

Accepted Answer

(I) is false because if a corporation suffers big losses, the demand for its bonds is likely to fall due to increased risk of default, not rise. (II) is true as the spread between interest rates on bonds with default risk and those without (default-free bonds) is indeed referred to as the risk premium, reflecting the additional risk investors take on.

Question 6

The spread between interest rates on low-quality corporate bonds and U.S.government bonds ________ during the Great Depression.
A) was reversed
B) narrowed significantly
C) widened significantly
D) did not change

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 a lack of investor confidence in companies during the economic turmoil, leading to higher perceived risk and therefore higher interest rates on corporate bonds. Meanwhile, demand for U.S. government bonds increased, leading to lower interest rates and a wider spread between the two types of bonds.

Question 7

(I)An increase in default risk on corporate bonds shifts the demand curve for corporate bonds to the left.
(II)An increase in default risk on corporate bonds shifts the demand curve for Treasury bonds to the right.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.

Accepted Answer

Both statements are true. An increase in default risk on corporate bonds makes them less attractive to investors, leading to a decrease in demand and shifting the demand curve to the left. Conversely, as investors seek safer investments, the demand for Treasury bonds, which are considered risk-free, increases, shifting their demand curve to the right.

Question 8

Bonds with relatively high risk of default are called
A) Brady bonds.
B) junk bonds.
C) zero coupon bonds.
D) investment-grade bonds.

Accepted Answer

Junk bonds are bonds that have a relatively high risk of default, often because they are issued by companies with poor credit ratings or unstable financial situations. They typically offer higher yields to compensate for this increased risk.

Question 9

Bonds with relatively low risk of default are called
A) zero coupon bonds.
B) junk bonds.
C) investment-grade bonds.
D) none of the above.

Accepted Answer

Investment-grade bonds are considered to have a relatively low risk of default compared to other types of bonds. Zero coupon bonds do not pay regular interest and may have a higher risk of default, while junk bonds are considered to have a high risk of default. Therefore, option C is the best choice for this question.

Question 10

Holding everything else the same,if a corporation's earnings rise,then the default risk on its bonds will ________ and the expected return on those bonds will ________.
A) increase; decrease
B) decrease; decrease
C) increase; increase
D) decrease; increase

Accepted Answer

If a corporation's earnings rise, it is considered as a positive sign indicating that the corporation is making more profits and becoming more financially stable. This will lead to a decrease in the default risk on its bonds, as the corporation will have a lower probability of defaulting on its payments. As a result, investors will require a lower return for holding the bonds, leading to an increase in the expected return on those bonds. Therefore, the correct choice is D - decrease; increase.

Question 11

The risk structure of interest rates is
A) the structure of how interest rates move over time.
B) the relationship among interest rates of different bonds with the same maturity.
C) the relationship among the terms to maturity of different bonds.
D) the relationship among interest rates on bonds with different maturities.

Accepted Answer

The risk structure of interest rates refers to the relationship among interest rates of different bonds with the same maturity, taking into account factors like credit risk.

Question 12

If Moody's or Standard and Poor's downgrades its rating on a corporate bond,the demand for the bond ________ and its yield ________.
A) increases; decreases
B) decreases; increases
C) increases; increases
D) decreases; decreases

Accepted Answer

When a credit rating agency such as Moody's or Standard and Poor's downgrades its rating on a corporate bond, it indicates a higher risk of default. As a result, investors demand a higher yield to compensate for the increased risk, leading to a decrease in demand for the bond and an increase in its yield.

Question 13

Moody's and Standard and Poor's are agencies that
A) help investors collect when corporations default on their bonds.
B) advise municipal bond issuers on the tax exempt status of their bonds.
C) produce information about the probability of default on corporate bonds.
D) maintain liquid markets for corporate bonds.

Accepted Answer

Moody's and Standard and Poor's are credit rating agencies that produce information about the probability of default on corporate bonds to assist investors in making informed decisions about investing in them.

Question 14

The risk premium on corporate bonds becomes smaller if
A) the riskiness of corporate bonds increases.
B) the liquidity of corporate bonds increases.
C) the liquidity of corporate bonds decreases.
D) the riskiness of corporate bonds decreases.
E) either B or D of the above occur.

Accepted Answer

The risk premium on corporate bonds decreases if the liquidity of the bonds increases or if the riskiness of the bonds decreases. Increased liquidity makes the bonds more attractive to investors, reducing the premium required to compensate for risk. Similarly, a decrease in riskiness directly reduces the risk premium required by investors.

Question 15

Holding everything else constant,if a corporation begins to suffer large losses,then the default risk on its bonds will ________ and the expected return on those bonds will ________.
A) increase: increase
B) decrease; increase
C) increase; decrease
D) decrease; decrease

Accepted Answer

If a corporation suffers large losses, its ability to make interest and principal payments on its bonds decreases, which increases the risk of default on those bonds. As a result, investors will demand a higher expected return to compensate for the increased default risk, leading to a decrease in the price of the bonds and an increase in their expected return.

Question 16

If a corporation's earnings rise,then the default risk on its bonds will ________ and the equilibrium interest rate on these bonds will ________.
A) increase; decrease
B) decrease; decrease
C) increase; increase
D) decrease; increase

Accepted Answer

If a corporation's earnings rise, the default risk on its bonds will decrease because the corporation has more profit to meet its debt obligations. As a result, the equilibrium interest rate on these bonds will also decrease since investors will require less compensation for the lower default risk.

Question 17

(I)An increase in default risk on corporate bonds shifts the demand curve for corporate bonds to the right.
(II)An increase in default risk on corporate bonds shifts the demand curve for Treasury bonds to the left.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.

Accepted Answer

An increase in default risk on corporate bonds makes them less attractive to investors, shifting the demand curve for corporate bonds to the left, not the right. Conversely, an increase in default risk on corporate bonds may make Treasury bonds more attractive due to their perceived safety, potentially shifting the demand curve for Treasury bonds to the right, not the left.

Question 18

Which of the following long-term bonds should have the lowest interest rate?
A) Corporate Baa bonds
B) U.S. Treasury bonds
C) Corporate Aaa bonds
D) Municipal bonds

Accepted Answer

The answer of Which of the following long-term bonds should...

Question 19

Which of the following long-term bonds should have the highest interest rate?
A) Corporate Baa bonds
B) U.S. Treasury bonds
C) Corporate Aaa bonds
D) Municipal bonds

Accepted Answer

Corporate Baa bonds typically have a higher interest rate compared to U.S. Treasury bonds, Corporate Aaa bonds, and Municipal bonds due to their lower credit quality. Higher risk associated with Baa bonds demands a higher yield as compensation.

Question 20

The term structure of interest rates is
A) the relationship among interest rates of different bonds with the same risk and maturity.
B) the structure of how interest rates move over time.
C) the relationship among the terms to maturity of different bonds from different issuers.
D) the relationship among interest rates on bonds with different maturities but similar risk.

Accepted Answer

The term structure of interest rates refers to the relationship among interest rates on bonds with different maturities but similar risk. It is also known as the yield curve.

Quiz 5: How Do Risk and Term Structure Affect Interest Rates?

As a result of the subprime collapse,the demand for low -quality corporate bonds ,the demand for high-quality Treasury bonds ,and the risk spread .

If a corporation begins to suffer large losses,then the default risk on its bonds will and the equilibrium interest rate on these bonds will .

A corporation suffering big losses might be more likely to suspend interest payments on its bonds,thereby

When the default risk on corporate bonds decreases,other things equal,the demand curve for corporate bonds shifts to the and the demand curve for Treasury bonds shifts to the .

(I) If a corporation suffers big losses,the demand for its bonds will rise because of the higher interest rates the firm must pay. (II) The spread between the interest rates on bonds with default risk and default-free bonds is called the risk premium.

The spread between interest rates on low-quality corporate bonds and U.S.government bonds ________ during the Great Depression.

(I) An increase in default risk on corporate bonds shifts the demand curve for corporate bonds to the left. (II) An increase in default risk on corporate bonds shifts the demand curve for Treasury bonds to the right.

Bonds with relatively high risk of default are called

Bonds with relatively low risk of default are called

Holding everything else the same,if a corporation's earnings rise,then the default risk on its bonds will and the expected return on those bonds will .

The risk structure of interest rates is

If Moody's or Standard and Poor's downgrades its rating on a corporate bond,the demand for the bond and its yield .

Moody's and Standard and Poor's are agencies that

The risk premium on corporate bonds becomes smaller if

Holding everything else constant,if a corporation begins to suffer large losses,then the default risk on its bonds will and the expected return on those bonds will .

If a corporation's earnings rise,then the default risk on its bonds will and the equilibrium interest rate on these bonds will .

(I) An increase in default risk on corporate bonds shifts the demand curve for corporate bonds to the right. (II) An increase in default risk on corporate bonds shifts the demand curve for Treasury bonds to the left.

Which of the following long-term bonds should have the lowest interest rate?

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

The term structure of interest rates is