Question 1

Everything else held constant,abolishing all taxes will
A)increase the interest rate on corporate bonds.
B)reduce the interest rate on municipal bonds.
C)increase the interest rate on municipal bonds.
D)increase the interest rate on Treasury bonds.

Accepted Answer

Abolishing all taxes would mean that municipal bonds, which are exempt from federal taxes, would no longer offer a tax advantage. This would result in a decrease in demand for municipal bonds and an increase in their interest rates. The interest rates on corporate bonds and Treasury bonds would not be directly affected by the abolishment of taxes.

Question 2

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)increasing; increasing
B)increasing; decreasing
C)decreasing; increasing
D)decreasing; decreasing

Accepted Answer

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

Question 3

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.
A)higher; lower
B)lower; lower
C)higher; higher
D)lower; higher

Accepted Answer

The Bush tax cut had the effect of increasing demand for financial assets, which includes municipal and Treasury bonds. With higher demand, the price of these bonds increased and led to a decrease in their interest rate. However, the decrease in the top income tax bracket would also decrease the supply of bonds as wealthy investors would seek to invest in other areas with better returns, which would lead to an increase in interest rates on Treasury bonds. The net effect would be a higher interest rate on municipal bonds and a lower interest rate on Treasury bonds, as predicted by choice A.

Question 4

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 5

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

Accepted Answer

The term structure of interest rates refers to the relationship among interest rates on bonds with different maturities. It shows the different yields that investors can earn for investing in bonds with varying maturities. This relationship is often depicted graphically as a yield curve, which shows the term to maturity of different bonds on the x-axis and the corresponding interest rate on the y-axis.

Question 6

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

Accepted Answer

An increase in liquidity of corporate bonds would make them more attractive to investors, which shifts the demand curve for corporate bonds to the right. However, as investors shift their demand towards corporate bonds, their demand for Treasury bonds decreases, thus shifting the demand curve for Treasury bonds to the left.

Question 7

Everything else held constant,the interest rate on municipal bonds rises relative to the interest rate on Treasury securities when
A)income tax rates are lowered.
B)income tax rates are raised.
C)municipal bonds become more widely traded.
D)corporate bonds become riskier.

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 8

Municipal bonds have default risk,yet their interest rates are lower than the rates on default-free Treasury bonds.This suggests that
A)the benefit from the tax-exempt status of municipal bonds is less than their default risk.
B)the benefit from the tax-exempt status of municipal bonds equals their default risk.
C)the benefit from the tax-exempt status of municipal bonds exceeds their default risk.
D)Treasury bonds are not default-free.

Accepted Answer

The fact that municipal bonds have lower interest rates than Treasury bonds despite having default risk suggests that the benefit from the tax-exempt status of municipal bonds exceeds their default risk. The tax-exempt status of municipal bonds makes them more attractive to investors, driving down their interest rates despite the risk of default.

Question 9

Three factors explain the risk structure of interest rates:
A)liquidity,default risk,and the income tax treatment of a security.
B)maturity,default risk,and the income tax treatment of a security.
C)maturity,liquidity,and the income tax treatment of a security.
D)maturity,default risk,and the liquidity of a security.

Accepted Answer

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

Question 10

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

Accepted Answer

When there is a decrease in liquidity of corporate bonds, investors may become less willing to hold these bonds, resulting in a decrease in demand. This shift in demand curve causes it to shift towards left. At the same time, as investors may seek safer investments, the demand for Treasury bonds may increase, causing the demand curve for Treasury bonds to shift towards right. Therefore, the correct choice is D- left; right.

Question 11

Which of the following statements is true?
A)State and local governments cannot default on their bonds.
B)Bonds issued by state and local governments are called municipal bonds.
C)All government issued bonds - local,state,and federal - are federal income tax exempt.
D)The coupon payment on municipal bonds is usually higher than the coupon payment on Treasury bonds.

Accepted Answer

Bonds issued by state and local governments are called municipal bonds.

Question 12

A decrease in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield of Treasury bonds,everything else held constant.
A)increase; increase
B)decrease; decrease
C)increase; decrease
D)decrease; increase

Accepted Answer

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

Question 13

An increase in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield of Treasury bonds,everything else held constant.
A)increase; increase
B)reduce; reduce
C)increase; reduce
D)reduce; increase

Accepted Answer

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

Question 14

The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and are ________ U.S.Treasury bonds.
A)less liquid than
B)less speculative than
C)tax-exempt unlike
D)lower-yielding than

Accepted Answer

Corporate bonds are generally considered less liquid than U.S. Treasury bonds, which are backed by the full faith and credit of the U.S. government, making them one of the most liquid investments in the world. This liquidity difference is a key factor in the risk premium associated with corporate bonds.

Question 15

Everything else held constant,if income tax rates were lowered,then
A)the interest rate on municipal bonds would fall.
B)the interest rate on Treasury bonds would rise.
C)the interest rate on municipal bonds would rise.
D)the price of Treasury bonds would fall.

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 16

Which of the following statements are true?
A)An increase in tax rates will increase the demand for Treasury bonds,lowering their interest rates.
B)Because the tax-exempt status of municipal bonds was of little benefit to bond holders when tax rates were low,they had higher interest rates than U.S.government bonds before World War II.
C)Interest rates on municipal bonds will be higher than comparable bonds without the tax exemption.
D)Because coupon payments on municipal bonds are exempt from federal income tax,the expected after-tax return on them will be higher for individuals in lower income tax brackets.

Accepted Answer

The answer of Which of the following statements are true?
A)An...

Question 17

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 18

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.
A)increasing; increasing
B)increasing; decreasing
C)decreasing; increasing
D)decreasing; decreasing

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 19

A(n)________ in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds,all else equal.
A)increase; increase; decrease
B)increase; decrease; decrease
C)decrease; increase; increase
D)decrease; decrease; decrease

Accepted Answer

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

Question 20

Everything else held constant,if the tax-exempt status of municipal bonds were eliminated,then
A)the interest rates on municipal bonds would still be less than the interest rate on Treasury bonds.
B)the interest rate on municipal bonds would equal the rate on Treasury bonds.
C)the interest rate on municipal bonds would exceed the rate on Treasury bonds.
D)the interest rates on municipal,Treasury,and corporate bonds would all increase.

Accepted Answer

Elimination of tax-exempt status of municipal bonds would mean that investors would have to pay taxes on the interest earned from these bonds. This would reduce the after-tax return on municipal bonds and make them less attractive to investors. As a result, the demand for municipal bonds would decrease, which would push down their prices and increase their yields (interest rates). This increase in yields would make the interest rate on municipal bonds exceed the rate on Treasury bonds.

Quiz 6: The Risk and Term Structure of Interest Rates

Everything else held constant,abolishing all taxes will

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.

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.

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.

The term structure of interest rates is

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,the interest rate on municipal bonds rises relative to the interest rate on Treasury securities when

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

Three factors explain the risk structure of interest rates:

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 .

Which of the following statements is true?

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

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

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

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

Which of the following statements are true?

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.

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.

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

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

Quiz 6: The Risk and Term Structure of Interest Rates

Everything else held constant,abolishing all taxes will

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.

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.

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.

The term structure of interest rates is

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,the interest rate on municipal bonds rises relative to the interest rate on Treasury securities when

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

Three factors explain the risk structure of interest rates:

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 ________.

Which of the following statements is true?

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

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

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

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

Which of the following statements are true?

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.

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.

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

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

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.

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.

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 .

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 .

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

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

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.

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