Question 1

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

Accepted Answer

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

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 ________.

Accepted Answer

An increase in the liquidity of corporate bonds will make them more attractive to investors and therefore shift the demand curve for corporate bonds to the right (B). However, this increase in demand for corporate bonds will come at the expense of Treasury bonds, which will become relatively less attractive and experience a decrease in demand, shifting the demand curve for Treasury bonds to the left (B).

Question 3

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.

Accepted Answer

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

Question 4

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

Accepted Answer

The answer of A decrease in the liquidity of corporate...

Question 5

Everything else held constant, abolishing all taxes will

Accepted Answer

The answer of Everything else held constant, abolishing all taxes...

Question 6

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

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 7

Which of the following statements is true?

Accepted Answer

Bonds issued by state and local governments are commonly referred to as municipal bonds.

Question 8

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

Accepted Answer

The tax-exempt status of municipal bonds allows investors to earn a lower interest rate compared to other taxable bonds while still achieving the same after-tax return. Eliminating this tax-exempt status would make municipal bonds less attractive relative to other bonds, causing the interest rates on municipal bonds to increase. Therefore, the interest rate on municipal bonds would exceed the rate on Treasury bonds.

Question 9

The Bush tax cut reduced the top income tax bracket from 39% to 35% over a ten-year period. Supply and demand analysis predicts the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds.

Accepted Answer

The Bush tax cut reduces government revenue, leading to an increase in the budget deficit. To finance the deficit, the government would have to issue more Treasury bonds. The increase in the supply of Treasury bonds would cause the price of Treasury bonds to fall and the interest rate to rise. The interest rate on municipal bonds would also rise because they compete with Treasury bonds for investors. Therefore, Choice A is the correct answer.

Question 10

The term structure of interest rates is

Accepted Answer

The term structure of interest rates refers to the relationship among interest rates on bonds with different maturities. This relationship is also known as the yield curve, which plots the interest rates of bonds with different maturities over time. The yield curve can be upward sloping, downward sloping, or flat, depending on the prevailing market conditions and investors' expectations about future interest rates.

Question 11

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.

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 12

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 13

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 14

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

Accepted Answer

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

Question 15

Three factors explain the risk structure of interest rates:

Accepted Answer

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

Question 16

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 ________.

Accepted Answer

A decrease in the liquidity of corporate bonds will make them less attractive to investors and cause a decrease in demand. This will shift the demand curve for corporate bonds to the left. On the other hand, investors may choose to shift their demand to the more liquid Treasury bonds, which will increase the demand for these bonds and shift their demand curve to the right. Therefore, the demand curve for corporate bonds shifts to the left and the demand curve for Treasury bonds shifts to the right.

Question 17

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

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 18

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

Accepted Answer

The higher risk premium on corporate bonds is due to their higher default risk compared to U.S. Treasury bonds. This default risk makes them less liquid than Treasury bonds. Therefore, choice A is the correct answer. Choices B, C, and D are not accurate descriptions of the relationship between corporate bonds and U.S. Treasury bonds.

Question 19

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

Accepted Answer

The lower interest rates on municipal bonds compared to Treasury bonds suggest that investors believe the benefit from the tax-exempt status of municipal bonds exceeds their default risk. This means that investors are willing to accept a lower return on their investment in exchange for the tax benefits of municipal bonds.

Question 20

Which of the following statements are true?

Accepted Answer

The answer of Which of the following statements are true?
...

Quiz 6: The Risk and Term Structure of Interest Rates

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