Question 1

During a "flight to quality"
A)the spread between Treasury bonds and Baa bonds increases.
B)the spread between Treasury bonds and Baa bonds decreases.
C)the spread between Treasury bonds and Baa bonds is not affected.
D)the change in the spread between Treasury bonds and Baa bonds cannot be predicted.

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 2

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 ________.
A)right; right
B)right; left
C)left; right
D)left; left

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 3

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 4

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

Accepted Answer

During times of economic uncertainty, like the Great Depression, investors tend to seek the safety of U.S. government bonds, causing the spread between their interest rates and those of riskier corporate bonds to widen.

Question 5

Which of the following long-term bonds has 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 higher interest rates compared to U.S. Treasury bonds, Corporate Aaa bonds, and Municipal bonds because they are considered to be riskier investments due to their lower credit ratings.

Question 6

Which of the following statements is true?
A)A liquid asset is one that can be quickly and cheaply converted into cash.
B)The demand for a bond declines when it becomes less liquid,decreasing the interest rate spread between it and relatively more liquid bonds.
C)The differences in bond interest rates reflect differences in default risk only.
D)The corporate bond market is the most liquid bond market.

Accepted Answer

A liquid asset is one that can be easily converted into cash without significant loss of value. Examples include cash, government bonds, and blue-chip stocks.

Question 7

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

Bonds with relatively high risk of default are called junk bonds.

Question 8

The collapse of the subprime mortgage market
A)did not affect the corporate bond market.
B)increased the perceived riskiness of Treasury securities.
C)reduced the Baa-Aaa spread.
D)increased the Baa-Aaa spread.

Accepted Answer

The collapse of the subprime mortgage market increased perceived riskiness in the bond market, leading to a decrease in demand for corporate bonds and an increase in demand for safer investments, such as Treasury securities. This increased demand for Treasury securities lowered their yields and subsequently widened the Baa-Aaa spread. Therefore, the correct choice is D.

Question 9

The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S.Treasury bonds.This is due to
A)a reduction in risk.
B)a reduction in maturity.
C)a flight to quality.
D)a flight to liquidity.

Accepted Answer

The collapse of the subprime mortgage market caused investors to flee from risky assets and seek safety in higher quality, lower risk investments such as U.S. Treasury bonds. This flight to quality caused a decrease in demand for Baa bonds, which are considered lower quality, and increased the spread between Baa and default-free U.S. Treasury bonds. Therefore, the correct answer is C, a flight to quality.

Question 10

Risk premiums on corporate bonds tend to ________ during business cycle expansions and ________ during recessions,everything else held constant.
A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

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 11

As their relative riskiness ________,the expected return on corporate bonds ________ relative to the expected return on default-free bonds,everything else held constant.
A)increases; increases
B)increases; decreases
C)decreases; decreases
D)decreases; does not change

Accepted Answer

According to the risk-return tradeoff, as the risk of an investment increases, so does the expected return. Therefore, as the relative riskiness of corporate bonds increases, their expected return should also increase. On the other hand, the expected return on default-free bonds will remain constant because they have a low risk of default. As a result, the gap between the expected return on corporate bonds and default-free bonds will widen, causing the expected return on corporate bonds to decrease relative to default-free bonds.

Question 12

Which of the following statements are true?
A)A decrease in default risk on corporate bonds lowers the demand for these bonds,but increases the demand for default-free bonds.
B)The expected return on corporate bonds decreases as default risk increases.
C)A corporate bond's return becomes less uncertain as default risk increases.
D)As their relative riskiness increases,the expected return on corporate bonds increases relative to the expected return on default-free bonds.

Accepted Answer

According to the statement, an increase in default risk reduces the expected return on corporate bonds. Therefore, the opposite statement that the expected return increases as default risk increases is false. The other statements are also either false or illogical.

Question 13

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 ________.
A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

Accepted Answer

If the federal government were to guarantee the payment to creditors in case a corporation goes bankrupt, the risk associated with investing in corporate bonds would decrease. As a result, investors would require a lower compensation (or lower interest rate) to hold such bonds. Hence, the interest rate on corporate bonds would decrease. On the other hand, since the risk of default associated with Treasury securities does not change, the interest rate on these securities would increase as investors would shift their funds from corporate bonds to Treasury securities seeking guaranteed returns.

Question 14

Which of the following securities has the lowest interest rate?
A)Junk bonds
B)U.S.Treasury bonds
C)Investment-grade bonds
D)Corporate Baa bonds

Accepted Answer

U.S. Treasury bonds typically have the lowest interest rates because they are backed by the full faith and credit of the U.S. government, making them a low-risk investment. Junk bonds and corporate Baa bonds typically have higher interest rates as they are considered higher risk investments, while investment-grade bonds are also considered lower risk but may still have slightly higher interest rates than U.S. Treasury bonds.

Question 15

Corporate bonds are not as liquid as government bonds because
A)fewer corporate bonds for any one corporation are traded,making them more costly to sell.
B)the corporate bond rating must be calculated each time they are traded.
C)corporate bonds are not callable.
D)corporate bonds cannot be resold.

Accepted Answer

Corporate bonds usually have lower trading volumes than government bonds, which can make them more expensive to sell due to wider bid-ask spreads and higher transaction costs. Additionally, some corporate bonds may have restrictions on their resale or transferability, further reducing their liquidity.

Question 16

If you have a very low tolerance for risk,which of the following bonds would you be least likely to hold in your portfolio?
A)a U.S.Treasury bond
B)a municipal bond
C)a corporate bond with a rating of Aaa
D)a corporate bond with a rating of Baa

Accepted Answer

A corporate bond with a rating of Baa is considered to be a higher risk investment than the other options listed. Therefore, someone with a very low tolerance for risk would be least likely to hold this type of bond in their portfolio. The other options listed have lower risk profiles - U.S. Treasury bonds are considered to be the safest investment, while municipal bonds and Aaa-rated corporate bonds also have relatively low risk profiles.

Question 17

As default risk decreases,the expected return on corporate bonds ________,and the return becomes ________ uncertain,everything else held constant.
A)increases; less
B)increases; more
C)decreases; less
D)decreases; more

Accepted Answer

As default risk decreases, investors become more confident in the likelihood of receiving payment from the corporation, leading to an increase in demand for corporate bonds. This increase in demand leads to a decrease in yield (expected return), as bond prices increase. However, since default risk is decreasing, the decrease in yield is accompanied by less uncertainty in the return, as investors become more confident in the corporation's ability to meet its debt obligations.

Question 18

Which of the following bonds would have the highest default risk?
A)Municipal bonds
B)Investment-grade bonds
C)U.S.Treasury bonds
D)Junk bonds

Accepted Answer

Junk bonds are high-yield bonds issued by companies with a low credit rating or no credit rating at all. These bonds have a higher default risk because the issuing companies are not considered financially stable. Municipal bonds, investment-grade bonds, and U.S. Treasury bonds are all considered safer investments with lower default risk.

Question 19

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 ________.
A)investment grade; lower grade
B)investment grade; junk bonds
C)high quality; lower grade
D)high quality; junk bonds

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 20

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.
A)U.S.Treasury
B)corporate Aaa
C)municipal
D)corporate Baa

Accepted Answer

Corporate Baa bonds are lower rated and therefore carry a higher risk of default, making them more sensitive to economic downturns such as the Great Depression. As a result, investors would require a higher risk premium to hold these bonds.

Quiz 6: The Risk and Term Structure of Interest Rates

During a "flight to quality"

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 .

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 .

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

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

Which of the following statements is true?

Bonds with relatively high risk of default are called

The collapse of the subprime mortgage market

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

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

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?

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 .

Which of the following securities has the lowest interest rate?

Corporate bonds are not as liquid as government bonds because

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

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

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

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 .

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.