Chap 6 M&B

The risk structure of interest rates is

• the structure of how interest rates move over time.

• the relationship among interest rates of different bonds with the same maturity.

• the relationship among the term to maturity of different bonds.

• the relationship among interest rates on bonds with different maturities.

The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is

• interest rate risk.

• inflation risk.

• moral hazard.

• default risk.

Bonds with no default risk are called

• flower bonds.

• no-risk bonds.

• default-free bonds.

• zero-risk bonds.

Which of the following bonds are considered to be default–risk free?

• Municipal bonds

• Investment–grade bonds

• U.S. Treasury bonds

• Junk bonds

U.S. government bonds have no default risk because

• they are backed by the full faith and credit of the federal government.

• the federal government can increase taxes to pay its obligations.

• they are backed with gold reserves.

• they can be exchanged for silver at any time.

The spread between the interest rates on bonds with default risk and default–free bonds is called the

• risk premium.

• junk margin.

• bond margin.

• default premium.

If the probability of a bond default increases because corporations begin to suffer large losses, then the default risk on corporate bonds will ______ and the expected return on these bonds will ______, everything else held constant.

• decrease; increase

• decrease; decrease

• increase; increase

• increase; decrease

A bond with default risk will always have a ______ risk premium and an increase in its default risk will ______ the risk premium.

• positive; raise

• positive; lower

• negative; raise

• negative; lower

If a corporation begins to suffer large losses, then the default risk on the corporate bond will

• increase and the bond’s return will become more uncertain, meaning the expected return on the corporate bond will fall.

• increase and the bond’s return will become less uncertain, meaning the expected return on the corporate bond will fall.

• decrease and the bond’s return will become less uncertain, meaning the expected return on the corporate bond will fall.

• decrease and the bond’s return will become less uncertain, meaning the expected return on the corporate bond will rise.

If the possibility of a default increases because corporations begin to suffer losses, then the default risk on corporate bonds will _______, and the bonds’ returns will become _______, meaning that the expected return on these bonds will decrease, everything else held constant.

• increase; less

• increase; more

• decrease; less

• decrease; more