Question 1

A plot of the interest rates on default-free Canada bonds with different terms to maturity is called ________.
A) a risk-structure curve
B) a default-free curve
C) a yield curve
D) an interest-rate curve

Accepted Answer

A yield curve is a graphical representation of the relationship between the interest rate and the time to maturity of debt securities. It shows the yield an investor is expecting to earn from bonds with different maturities. The default-free characteristic of the Canada bonds is implied by the fact that they are used in constructing the yield curve. The other options are not commonly used to describe a yield curve.

Question 2

The interest rate on tax-exempt bonds falls relative to the interest rate on U.S. Treasury securities when ________.
A) there is a major default in the tax-exempt bond market
B) income tax rates are raised
C) tax-exempt bonds become less widely traded
D) corporate bonds become riskier

Accepted Answer

Tax-exempt bonds are more attractive to investors when income tax rates are higher because they provide a higher after-tax yield. As a result, demand for tax-exempt bonds increases and their interest rates fall relative to U.S. Treasury securities.

Question 3

When yield curves are downward sloping, ________.
A) long-term interest rates are above short-term interest rates
B) short-term interest rates are above long-term interest rates
C) short-term interest rates are about the same as long-term interest rates
D) medium-term interest rates are above both short-term and long-term interest rates

Accepted Answer

A downward sloping yield curve, also known as an inverted yield curve, indicates that short-term interest rates are higher than long-term interest rates. This is a relatively rare phenomenon and is often seen as a predictor of an economic recession.

Question 4

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 risk structure of interest rates is explained by liquidity, default risk, and the income tax treatment of a security. These factors influence the interest rate that borrowers must pay.

Question 5

If the U.S. 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 U.S. government where to raise...

Question 6

If income tax rates were lowered, then ________.
A) the interest rate on tax-exempt bonds would fall
B) the interest rate on U.S. Treasury bonds would rise
C) the interest rate on tax-exempt bonds would rise
D) the price of Canada bonds would fall

Accepted Answer

When income tax rates are lowered, the after-tax return on tax-exempt bonds becomes relatively more attractive, resulting in an increase in their demand and a subsequent rise in their interest rates. Therefore, the interest rate on tax-exempt bonds would rise.

Question 7

Typically, yield curves are ________.
A) gently upward sloping
B) mound shaped
C) flat
D) bowl shaped

Accepted Answer

Yield curves are typically gently upward sloping, reflecting higher interest rates for longer-term investments compared to short-term investments due to the increased risk and time value of money.

Question 8

Explain using a diagram how the "flight to quality" after the Subprime collapse lead to a rising spread between lower-quality (BBB-rated) and highest-quality (AAA-rated) bonds.

Accepted Answer

The answer of Explain using a diagram how the "flight...

Question 9

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 is also known as the yield curve, which plots the interest rates of bonds with different maturities against each other.

Question 10

Based on default risk, which bonds are called: a. "investment grade", b. "junk bonds" or "speculative-grade", and c. "fallen angels"?

Accepted Answer

The answer of Based on default risk, which bonds are...

Question 11

Explain the factors that determine the risk structure of interest rates. Explain how a change of each factor changes interest rates.

Accepted Answer

The answer of Explain the factors that determine the risk...

Question 12

If income tax rates were lowered, then ________.
A) the prices of tax-exempt bonds would fall
B) the interest rate on tax-exempt bonds would fall
C) the interest rate on U.S. Treasury bonds would rise
D) the prices of tax-exempt bonds would rise

Accepted Answer

Lowering income tax rates would make tax-exempt bonds less attractive compared to taxable bonds, leading to a decrease in demand and thus a fall in their prices.

Question 13

If income tax rates were lowered, then ________.
A) the interest rate on tax-exempt bonds would rise
B) the interest rate on U.S. Treasury bonds would rise
C) the interest rate on tax-exempt bonds would fall
D) the interest rate on tax-exempt bonds would stay the same

Accepted Answer

Lowering income tax rates makes tax-exempt bonds less attractive compared to taxable bonds, leading to a decrease in demand for tax-exempt bonds and causing their interest rates to rise.

Question 14

When yield curves are steeply upward sloping, ________.
A) long-term interest rates are above short-term interest rates
B) short-term interest rates are above long-term interest rates
C) short-term interest rates are about the same as long-term interest rates
D) medium-term interest rates are above both short-term and long-term interest rates

Accepted Answer

When yield curves are steeply upward sloping, it is an indication that long-term interest rates are higher than short-term interest rates. This is also referred to as a "normal" yield curve.

Question 15

Tax-exempt bond interest rates increase relative to corporate bond interest rates when ________.
A) income taxes are increased
B) corporate bonds become riskier
C) U.S. Treasury securities become more widely traded
D) there is a major default in the tax-exempt bond market

Accepted Answer

The answer of Tax-exempt bond interest rates increase relative to...

Question 16

The interest rate on tax-exempt bonds rises relative to the interest rate on U.S. Treasury securities when ________.
A) income tax rates are raised
B) tax-exempt bonds become more widely traded
C) corporate bonds become riskier
D) income tax rates are lowered

Accepted Answer

When income tax rates are lowered, the tax advantage of tax-exempt bonds decreases, making them less attractive relative to taxable U.S. Treasury securities, causing their interest rates to rise.

Question 17

The spread between the interest rates on Baa corporate bonds and Canada bonds was 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

Demonstrate graphically and explain how a reduction in default risk affects the demand or supply of corporate and Canada bonds.

Accepted Answer

The answer of Demonstrate graphically and explain how a reduction...

Question 19

Differences in ________ explain why interest rates on Treasury securities are not all the same.
A) risk
B) liquidity
C) time to maturity
D) tax characteristics

Accepted Answer

Differences in time to maturity explain why interest rates on Treasury securities are not all the same, as longer-term securities typically have higher interest rates to compensate for the increased risk over time.

Question 20

When yield curves are flat, ________.
A) long-term interest rates are above short-term interest rates
B) short-term interest rates are above long-term interest rates
C) short-term interest rates are about the same as long-term interest rates
D) medium-term interest rates are above both short-term and long-term interest rates

Accepted Answer

When yield curves are flat, it means that the difference between short-term and long-term interest rates is minimal. Therefore, short-term interest rates are about the same as long-term interest rates.

Quiz 6: The Risk and Term Structure of Interest Rates

A plot of the interest rates on default-free Canada bonds with different terms to maturity is called ________.

The interest rate on tax-exempt bonds falls relative to the interest rate on U.S. Treasury securities when ________.

When yield curves are downward sloping, ________.

Three factors explain the risk structure of interest rates: ________.

If the U.S. government where to raise the income tax rates, would this have any impact on a state's cost of borrowing funds? Explain.

If income tax rates were lowered, then ________.

Typically, yield curves are ________.

Explain using a diagram how the "flight to quality" after the Subprime collapse lead to a rising spread between lower-quality (BBB-rated) and highest-quality (AAA-rated) bonds.

The term structure of interest rates is ________.

Based on default risk, which bonds are called: a. "investment grade", b. "junk bonds" or "speculative-grade", and c. "fallen angels"?

Explain the factors that determine the risk structure of interest rates. Explain how a change of each factor changes interest rates.

If income tax rates were lowered, then ________.

If income tax rates were lowered, then ________.

When yield curves are steeply upward sloping, ________.

Tax-exempt bond interest rates increase relative to corporate bond interest rates when ________.

The interest rate on tax-exempt bonds rises relative to the interest rate on U.S. Treasury securities when ________.

The spread between the interest rates on Baa corporate bonds and Canada bonds was very large during the Great Depression years 1930-1933. Explain this difference using the bond supply and demand analysis.

Demonstrate graphically and explain how a reduction in default risk affects the demand or supply of corporate and Canada bonds.

Differences in ________ explain why interest rates on Treasury securities are not all the same.

When yield curves are flat, ________.