Question 1

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 2

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 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.
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 4

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 is also known as the yield curve and it represents the relationship between interest rates and bond yields with different maturities. It is a graphical representation of the yields of bonds with different maturities arranged in order of their time to maturity.

Question 5

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 6

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 7

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 8

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 the liquidity of corporate bonds makes them more attractive to investors, leading to a shift in the demand curve for corporate bonds to the right. As investors move their funds from less liquid Treasury bonds to more liquid corporate bonds, the demand curve for Treasury bonds shifts to the left.

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

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 11

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

If the tax-exempt status of municipal bonds were eliminated, investors would demand higher yields to compensate for the additional tax burden. This would cause the interest rates on municipal bonds to increase, potentially to a level where they exceed the interest rate on Treasury bonds. Corporate bonds may also experience an increase in interest rates due to the increased competition from municipal bonds.

Question 12

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 13

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

The risk premium on corporate bonds is the additional return that investors demand because of the risk of default. Corporate bonds are considered to be less liquid than U.S. Treasury bonds, meaning they are harder to sell quickly without affecting the price.

Question 14

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 despite default risk suggests that the benefit from their tax-exempt status is greater than their default risk. This means investors are willing to accept a lower rate of return for the tax benefits offered by municipal bonds.

Question 15

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

A decrease in the liquidity of corporate bonds would make them less attractive to investors, causing a decrease in demand and a leftward shift in the demand curve. As a result, investors may switch to safer and more liquid investments such as Treasury bonds, causing an increase in demand and a rightward shift in the demand curve for Treasury bonds.

Question 16

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. Choice A is incorrect because state and local governments can default on their bonds. Choice C is incorrect because only municipal bond interest is federally tax-exempt, not all government-issued bonds. Choice D is incorrect because typically, the coupon payment on municipal bonds is lower than that of Treasury bonds.

Question 17

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 18

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

Before World War II, the tax-exempt status of municipal bonds was less beneficial when tax rates were low, leading to higher interest rates compared to U.S. government bonds.

Question 19

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 remove the tax-exempt status of municipal bonds, making them less attractive compared to other bonds, thus increasing their interest rates to attract investors.

Question 20

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.

Quiz 6: The Risk and Term Structure of Interest Rates

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.

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.

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 term structure of interest rates is

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

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.

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.

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 .

Three factors explain the risk structure of interest rates:

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

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

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.

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

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.

Which of the following statements are true?

Everything else held constant,abolishing all taxes will

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

Quiz 6: The Risk and Term Structure of Interest Rates

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.

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.

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 term structure of interest rates is

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

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.

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.

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 ________.

Three factors explain the risk structure of interest rates:

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

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

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.

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

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.

Which of the following statements are true?

Everything else held constant,abolishing all taxes will

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

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.

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(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,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.

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 .

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 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.