Exam 2

Question 1

The risk structure of interest rates refers to

Answer 1

the relationship among the interest rates on bonds with the same maturity

Question 2

When a company whose ability to repay its obligations in full is uncertain borrows funds

Answer 2

it must offer investors higher yields to compensate them for the risk they take in buying their bonds or making loans

Question 3

Default risk

Answer 3

is the probability that a borrower will not pay in full the promised interest or principal

Question 4

US Treasury securities

Answer 4

are considered to be default risk free because the gov can print money and raise taxes

Question 5

The default risk premium is most often measured

Answer 5

as the difference between the yield on the security and the yield on a US Treasury security of the same maturity

Question 6

Bond ratings

Answer 6

are published by private bond rating agencies

Question 7

Junk (high risk) bonds

Answer 7

One can profit by owning them if market perceptions of their default risk declines

Question 8

A flight to quality refers to a shift by savers from:

Answer 8

low-quality bonds and into high-quality bonds

Question 9

The creation of the ratings for debt securities has

Answer 9

lowered returns on corporate bonds

Question 10

If the federal gov replaced the current income tax with a federal sales tax

Answer 10

the prices of Treasury bonds would rise, while the prices of municipal bonds would fall

Question 11

What would be considered an investment grade rating?

Answer 11

BBB-

Question 12

In the bond market, the issuer is considered to be

Answer 12

the borrower

Question 13

If there is an excess supply of bonds at a given interest rate, then

Answer 13

the price of bonds will fall

Question 14

If there is an excess demand for bonds at a given price of bonds, then

Answer 14

the interest rate will fall

Question 15

As wealth increases in the economy, savers are willing to

Answer 15

buy more bonds at any given price

Question 16

If the expected gains on stocks rise, while the expected returns on bonds do not change, then

Answer 16

the demand curve for bonds will shift to the left

Question 17

Suppose congress passes a law that prohibits mutual funds from holding corporate bonds. The likely result in the debt would be an

Answer 17

increase in the equilibrium interest rate

Question 18

An increase in the corporate profits tax is likely to cause

Answer 18

the equilibrium interest rate to fall and the equilibrium price of bonds to rise

Question 19

If the gov were to increase taxes while holding expenditures constant, we would expect

Answer 19

the bond supply curve to shift left and the equilibrium interest rate will fall

Question 20

Everything else held constant, if the expected return on US Treasury bonds falls from 10 to 9 percent and the expected return on GE stock falls from 7 to 5 percent, then the expected return of holding GE stock ____ relative to US treasury bonds and the demand for GE stock _____.

Answer 20

falls: rises

Question 21

If fluctuations in the stock market become less volatile, then, other things equal, the demand for long-term bonds _____ and the demand for stocks _____

Answer 21

decreases: increases

Question 22

The supply curve for bonds has the usual upward slope, indicating that as the price _____, ceteris paribus, the _____ increases.

Answer 22

rises: quantity supplied