Question 1

The following graphs show what occurs during a flight to quality for the loanable funds market for T-bills (left)and the market for investment grade bonds (right).

Based on the information presented in the graphs, which of the following statements is true?

Accepted Answer

The answer of The following graphs show what occurs during...

Question 2

A saver is trying to decide whether to invest in a corporate bond or a municipal bond. The corporate bond has a 5% interest rate, and the saver faces a marginal tax rate of 25%. The municipal bond has a rate of 4%. Which should the saver choose?

Accepted Answer

The answer of A saver is trying to decide whether...

Question 3

How did a change in the business model for bond rating agencies contribute to a conflict of interest today?

Accepted Answer

Bond rating agencies being paid by the bond issuers creates a conflict of interest because the agencies have a financial incentive to provide favorable ratings to please their clients (the issuers), potentially at the expense of accuracy or impartiality.

Question 4

Which of the following is true of issuers with a lower bond rating?

Accepted Answer

Issuers with a lower bond rating are considered to have a higher risk of default, so they offer bonds with a higher interest rate to compensate investors for that increased risk.

Question 5

During a flight to quality, the default risk premium spread between medium-quality and low-quality Baa bonds and high-quality T-bills will

Accepted Answer

During a flight to quality, investors move their money to safer assets, causing the default risk premium spread between riskier bonds (like medium-quality and low-quality Baa bonds) and safer assets (like high-quality T-bills) to widen.

Question 6

Which of the following markets were hard hit first (and most)by the flight to quality in 2008?

Accepted Answer

Municipal bonds and commercial paper markets were among the first and most affected by the flight to quality in 2008, as investors moved their money to safer assets like Treasury bills, leading to increased yields (and thus decreased prices) in these markets.

Question 7

If the Ohio Teachers Retirement Fund is considering buying bonds issued by Johnson Electric Corporation and is wanting to evaluate the default risk of the bonds, under the current business model used by the bond-rating agencies, Johnson Electric Corporation must pay the bond-rating agencies to provide the bond rating.

Accepted Answer

Bond-rating agencies, such as Moody's, Standard & Poor's, and Fitch, typically charge the issuers of debt, like Johnson Electric Corporation, for the service of rating their bonds. This model is used to assess the creditworthiness of the bond issuer, which helps investors, including the Ohio Teachers Retirement Fund, evaluate the default risk of the bonds.

Question 8

Describe the potential conflict of interest that arises due to the way bond-rating agencies earn income.

Accepted Answer

The answer of Describe the potential conflict of interest that...

Question 9

How is a sinking fund different from a call provision?

Accepted Answer

The answer of How is a sinking fund different from...

Question 10

Which of these statements best describes the flight to quality that began in the autumn of 2008?

Accepted Answer

During the financial crisis that began in the autumn of 2008, investors rapidly shifted their investments from riskier assets, including medium-rated corporate bonds, to safer assets like Treasury bills (T-bills), seeking safety amid the financial turmoil. This phenomenon is known as a flight to quality.

Question 11

If Luis buys a bond from Robinson Manufacturing Company and the company has a sinking fund, an early buyback of the bonds may be required under the terms of the sinking fund.

Accepted Answer

A sinking fund is a means for a company to pay off part of their debt before it matures. If Robinson Manufacturing Company has a sinking fund for its bonds, it may indeed require the early buyback of these bonds as part of its strategy to manage and reduce its debt obligations efficiently.

Question 12

General obligation bonds generally do not have to be approved by taxpayers.

Accepted Answer

General obligation bonds often require voter approval since they are backed by the full faith and credit of the issuing municipality, which usually means they are funded by taxpayer dollars.

Question 13

Given the spotty performance of the bond-rating agencies in sounding the alarm of impending failure among many large borrowers, what action was taken in 2011 to ensure better performance?

Accepted Answer

The Dodd-Frank Act of 2011 established an Office of Credit Ratings at the Securities and Exchange Commission (SEC) to oversee the activities of bond-rating agencies, aiming to improve their performance and accountability.

Question 14

The global financial crisis that began in 2008 involved a flight to quality and a flight to liquidity.

Accepted Answer

During the global financial crisis that began in 2008, investors moved their money to safer assets (flight to quality) and more liquid assets (flight to liquidity) due to increased uncertainty and risk in the financial markets.

Question 15

The following graph shows what occurred during a flight to quality for the loanable funds market for US Treasury securities and the loanable funds market for the rest of the world.

Based on the information presented in the graph, which of the following statements is true?

Accepted Answer

The answer of The following graph shows what occurred during...

Quiz 16: Bond Markets

The following graphs show what occurs during a flight to quality for the loanable funds market for T-bills (left) and the market for investment grade bonds (right) . Based on the information presented in the graphs, which of the following statements is true?