Question 1

How do ratings agencies earn income?

Accepted Answer

They primarily earn ...

Question 2

Which theory explains all three facts about the term structure?

Accepted Answer

A)  expectations
B)  segmented markets
C)  preferential treatment
D)  liquidity premium

Question 3

Currently, a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%. What is the risk premium of the typical A-rated ten-year corporate bond with a yield of 5.5%?

Accepted Answer

A)  0) 5%
B)  0) 8%
C)  5) 5%
D)  1) 17%

Question 4

Bond ratings

Accepted Answer

A)  are published annually by the federal government and are based largely on information contained in corporate tax returns.
B)  are published annually by the federal government and are based on publicly available information.
C)  are published monthly by the federal government and are based on publicly available information.
D)  are published by private bond-rating agencies.

Question 5

The default risk premium is

Accepted Answer

A)  relevant only for securities issued by very small companies.
B)  the additional yield a saver requires for holding a bond with some default risk.
C)  zero for corporate bonds, but quite substantial for corporate stock.
D)  constant across the business cycle.

Question 6

Which of the following statements is true?

Accepted Answer

A)  The more liquid the bond, the lower the yield.
B)  Tax-free bonds normally have a higher interest rate than other types of bonds.
C)  The price of a bond increases as it becomes more risky.
D)  The yield curve illustrates the relative default risks of alternative types of bonds.

Question 7

Bonds receiving one of the top four ratings are considered:

Accepted Answer

A)  junk
B)  speculative
C)  AAA
D)  investment grade

Question 8

Following the downgrade of U.S. debt by Standard & Poor's in August, 2011:

Accepted Answer

A)  other rating agencies also downgraded U.S. debt
B)  interest rates spiked as investor's perception of risk increased
C)  investors didn't seem to be any more concerned about default risk than before the downgrade
D)  the U.S. implemented a plan to significantly reduce its budget deficit later that year

Question 9

Which of the following is NOT true of the term premium?

Accepted Answer

A)  It is zero under the expectations theory.
B)  It is infinite under the segmented markets theory.
C)  It increases as a bond's maturity increases.
D)  It is zero for thirty-year bonds.

Question 10

How does the liquidity premium theory explain an upward sloping yield curve during normal economic times?

Accepted Answer

During normal economic times, future sho...

Question 11

Some claim that ratings agencies have a conflict of interest since:

Accepted Answer

A)  they rate the quality of their own bonds
B)  since agencies charge firms for their services rather than investors, they have an incentive to give high ratings to gain business
C)  government began to include bond ratings as part of regulations of mutual funds, banks, and financial firms
D)  they issued many of the mortgages that were later securitized into bonds

Question 12

Which of the following is NOT a reason that credit ratings agencies became more relevant beginning in the late 1970s?

Accepted Answer

A)  the number of bond defaults rose due to periods of recession and inflation
B)  rating agencies began to charge investors for their services
C)  governments began to include bond ratings in their regulation of banks, mutual funds, and other financial firms
D)  rating agencies began to rate bonds issued by foreign governments and firms

Question 13

Which of the following is the highest bond rating assigned by Moody's Investors Service?

Accepted Answer

A)  Aaa
B)  A
C)  B
D)  Baa

Question 14

According to the liquidity premium theory, the yield curve normally has a positive slope because

Accepted Answer

A)  short-term interest rates are expected to rise.
B)  term premiums rise as the time to maturity increases.
C)  risk premiums rise over time.
D)  long-term bonds are more liquid than short-term bonds.

Question 15

The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that

Accepted Answer

A)  yield curves usually slope upward.
B)  yield curves usually slope downward.
C)  instruments with different maturities are perfect substitutes.
D)  savers are usually risk averse.

Question 16

Under the expectations theory, an upward-sloping yield curve indicates that investors expect future short-term rates to

Accepted Answer

A)  fall.
B)  rise.
C)  remain constant.
D)  either rise or remain constant.

Question 17

Which of the following is the lowest rating given to an investment-grade bond by Moody's?

Accepted Answer

A)  Aa
B)  A
C)  Baa
D)  B

Question 18

Which of the following is considered a default-risk-free instrument?

Accepted Answer

A)  a three-month commercial paper issued by GE
B)  a share of stock issued by Google
C)  a three-month Treasury bill
D)  a ten-year bond issued by Intel

Question 19

If the expectations theory of the term structure is correct, would a reduction in the supply of thirty-year Treasury bonds affect their yields?

Accepted Answer

No. According to the expectations theory...

Question 20

Suppose that savers become less willing to purchase medium-quality corporate bonds. The result will be that the prices of medium-quality corporate bonds will

Accepted Answer

A)  fall relative to the price of U.S. Treasury securities, but rise relative to the price of high-quality corporate bonds.
B)  rise relative to the price of U.S. Treasury securities, but fall relative to the price of high-quality corporate bonds.
C)  rise relative to the prices of U.S. Treasury securities and high-quality corporate bonds.
D)  fall relative to the prices of U.S. Treasury securities and high-quality corporate bonds.

Exam 5: The Risk Structure and Term Structure of Interest Rates

How do ratings agencies earn income?

Correct AnswerverifiedThey primarily earn ...View AnswerShow Answer

Under the expectations theory, an upward-sloping yield curve indicates that investors expect future short-term rates to

Correct AnswerverifiedShow Answer

If the expectations theory of the term structure is correct, would a reduction in the supply of thirty-year Treasury bonds affect their yields?

Correct AnswerverifiedNo. According to the expectations theory...View AnswerShow Answer

Which of the following is the lowest rating given to an investment-grade bond by Moody's?

Correct AnswerverifiedShow Answer

Suppose that savers become less willing to purchase medium-quality corporate bonds. The result will be that the prices of medium-quality corporate bonds will

Correct AnswerverifiedShow Answer

Bond ratings

Correct AnswerverifiedShow Answer

Bonds receiving one of the top four ratings are considered:

Correct AnswerverifiedShow Answer

Following the downgrade of U.S. debt by Standard & Poor's in August, 2011:

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

Which of the following is NOT a reason that credit ratings agencies became more relevant beginning in the late 1970s?

Correct AnswerverifiedShow Answer

The default risk premium is

Correct AnswerverifiedShow Answer

Currently, a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%. What is the risk premium of the typical A-rated ten-year corporate bond with a yield of 5.5%?

Correct AnswerverifiedShow Answer

The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that

Correct AnswerverifiedShow Answer

How does the liquidity premium theory explain an upward sloping yield curve during normal economic times?

Correct AnswerverifiedDuring normal economic times, future sho...View AnswerShow Answer

Some claim that ratings agencies have a conflict of interest since:

Correct AnswerverifiedShow Answer

Which of the following is the highest bond rating assigned by Moody's Investors Service?

Correct AnswerverifiedShow Answer

Which of the following is considered a default-risk-free instrument?

Correct AnswerverifiedShow Answer

Which theory explains all three facts about the term structure?

Correct AnswerverifiedShow Answer

According to the liquidity premium theory, the yield curve normally has a positive slope because

Correct AnswerverifiedShow Answer

Which of the following is NOT true of the term premium?

Correct AnswerverifiedShow Answer

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No. According to the expectations theory...
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During normal economic times, future sho...
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