 |
| 1 | |
Bonds that are rated Baa or better by Moody's (or rated as BBB or better by Standard & Poor's) are referred to as: |
| | A) | investment grade. |
| | B) | speculative grade. |
| | C) | highly speculative. |
| | D) | junk bonds. |
|
|
|
| 2 | |
Bonds that were initially released as investment grade, but were later reclassified as junk bonds are known as: |
| | A) | transitional junk bonds. |
| | B) | investment-grade junk bonds. |
| | C) | fallen angels. |
| | D) | defaulted bonds. |
|
|
|
| 3 | |
Commercial paper is: |
| | A) | a short-term loan issued on a discount basis. |
| | B) | a long-term loan issued on a discount basis. |
| | C) | essentially equivalent to a long-term coupon bond. |
| | D) | another name for a short-term coupon bond. |
|
|
|
| 4 | |
The default-risk premium on a bond equals the: |
| | A) | expected return on the bond. |
| | B) | difference between the expected return on the bond and the U.S. Treasury yield. |
| | C) | sum of the expected return on the bond and the risk-free return. |
| | D) | U.S. Treasury yield. |
|
|
|
| 5 | |
Economic theory and empirical evidence indicate that: |
| | A) | longer-term bonds are riskier than short-term bonds and interest rates are generally higher on longer-term bonds. |
| | B) | interest rates on all categories of bonds are likely to move together over time. |
| | C) | the interest rate is higher on bonds that are riskier. |
| | D) | All of the above are correct. |
| | E) | None of the above is correct. |
|
|
|
| 6 | |
If the interest-rate on a taxable bond is 8%, and the income tax rate for a typical bondholder is 25%, then a tax-free bond with the same risk and maturity will offer a yield of: |
| | A) | 12.5%. |
| | B) | 10.5%. |
| | C) | 10%. |
| | D) | 6%. |
| | E) | None of the above is correct. |
|
|
|
| 7 | |
For a typical bondholder, municipal bonds offer a pre-tax yield that is _______ that of federal government bonds, and an after-tax yield that is ______ that of federal government bonds. |
| | A) | lower than; lower than |
| | B) | higher than; higher than |
| | C) | lower than; higher than |
| | D) | greater than; equal to |
| | E) | equal to; greater than |
|
|
|
| 8 | |
Yield curves are generally: |
| | A) | horizontal. |
| | B) | vertical. |
| | C) | upward sloping. |
| | D) | downward sloping. |
|
|
|
| 9 | |
Which of the following statements concerning the term structure of interest rates is false? |
| | A) | Long-term bonds generally provide lower interest rates than do short-term bonds. |
| | B) | Interest rates tend to move together over time for bonds of different maturities. |
| | C) | Yields on short-term bonds are more volatile than yields on long-term bonds. |
| | D) | All of the above are correct statements. |
|
|
|
| 10 | |
Under the expectations hypothesis, if people expect interest rates to be stable over time, yield curves would be: |
| | A) | upward sloping. |
| | B) | downward sloping. |
| | C) | horizontal. |
| | D) | vertical. |
|
|
|
| 11 | |
Under the expectations hypothesis, a downward sloping yield curve indicates that people believe that short-term interest rates will: |
| | A) | rise over time. |
| | B) | fall over time. |
| | C) | remain constant. |
| | D) | change in an unpredictable manner over time. |
|
|
|
| 12 | |
Suppose that the current interest rate on 1-year bonds is 5% and the expected interest rates on 1-year bonds next year and the following year are 7% and 9%, respectively. Under the expectations hypothesis, the interest rate on a 3-year bond today will equal: |
| | A) | 5%. |
| | B) | 7%. |
| | C) | 9%. |
| | D) | 21%. |
|
|
|
| 13 | |
The expectations hypothesis explains why: |
| | A) | interest rates move together for bonds of different maturities. |
| | B) | yield curves are generally upward sloping. |
| | C) | yield curves are generally downward sloping. |
| | D) | None of the above is correct. |
|
|
|
| 14 | |
The liquidity premium theory modifies the expectations hypothesis by taking into account the: |
| | A) | higher inflation risk and interest-rate risk associated with longer-term bonds |
| | B) | effect of expectations of future interest rates on current short-term interest rates. |
| | C) | higher inflation rate that always occurs in the long run. |
| | D) | None of the above is correct. |
|
|
|
| 15 | |
Suppose the current and expected future interest rate is 4% for each of the next two years. Under the liquidity premium theory of the term structure, the interest rate on a 3-year bond will be: |
| | A) | 4%. |
| | B) | greater than 4%. |
| | C) | less than 4% |
| | D) | 12%. |
|
|
|
| 16 | |
According to the liquidity premium theory of the term structure, the risk premium ____ as the maturity of the bond rises. |
| | A) | rises |
| | B) | falls |
| | C) | remains constant |
| | D) | changes in an unpredictable manner |
|
|
|
| 17 | |
According to the liquidity premium theory of the term structure, a horizontal yield curve indicates that short-term interest rates are expected to _________ over time. |
| | A) | rise |
| | B) | fall |
| | C) | remain constant |
| | D) | change in an unpredictable manner |
|
|
|
| 18 | |
When an economic downturn occurs, the risk spread generally: |
| | A) | narrows. |
| | B) | widens. |
| | C) | does not change. |
| | D) | sometimes widens and sometimes narrows, with roughly equal probability. |
|
|
|
| 19 | |
Based on past experience, when an inverted yield curve is observed, a recession is: |
| | A) | not likely to occur within the next 5 years. |
| | B) | likely to begin within a week or two. |
| | C) | likely to begin within 2-3 months. |
| | D) | likely to begin in about a year. |
|
|
|
| 20 | |
An inverted yield curve often occurs when: |
| | A) | the Fed is trying to reduce inflationary pressures, resulting in high short-term interest rates. |
| | B) | the Fed is trying to stimulate the economy, resulting in low long-term interest rates. |
| | C) | most bond traders people expect interest rates to rise in the future. |
| | D) | None of the above is correct. |
|
|
.