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WorksheetsFMT tutorial 4
Total questions: 15
Worksheet time: 8mins
Generally, which bond has the highest interest rate?
Long-term Government Bonds
Corporate Baa Bonds
Corporate Aaa Bo
Municipal Bonds
Default risk is:
the chance the issuing firm will be sold to another firm
the chance the issuer will retire the debt early.
the chance the issuer will be unable to make interest payments or repay principal
the chance the issuer will sell more debt.
Suppose that there are two bonds, A and B. Suppose also the default risk on bond A increases. As a result of this we would expect to see:
the demand for A to increase and the demand for B to decrease.
the demand for A to decrease and the demand for B to increase.
the demand for A to decrease and the demand for B to decrease.
the demand for A to increase and the demand for B to increase.
The risk premium on a bond is:
the difference in interest rate between that bond and a municipal bond.
the difference in interest rate between that bond and a bank CD.
the difference in interest rate between that bond and US Treasury bond.
the difference in interest rates between that bond and a S&P 500 firm bond.
An increase in the level of risk for bond A will:
increase the risk premium on bond B and reduce the risk premium on bond A.
increase the risk premium on bond A and increase the risk premium on bond B.
reduce the risk premium on bond A and reduce the risk premium on bond B.
increase the risk premium on bond A and reduce the risk premium on bond B.
Municipal bonds generally have lower interest rates than U.S. Government bonds because:
they have less risk.
they are exempt from Federal taxes.
they never mature.
they are more liquid.
Yield curves show:
the relationship between bond interest rates (yields) and bond prices.
the relationship between time to maturity and bond interest rates (yields).
the relationship between risk and bond interest rates (yields).
the relationship between liquidity and bond interest rates (yields).
The liquidity premium theory explains an inverted yield curve by
Assuming that interest rated move together over time
Assuming that the liquidity premium is always positive
Assuming that short-term rates are expected to fall to a great degree in the future
Assuming that investors prefer shorter-term bonds over longer maturity bonds
The liquidity premium theory suggests that yield curves should usually be:
inverted.
up-sloping through year 1, then flat thereafter.
flat.
up-sloping.
The liquidity premium theory is based upon the idea that, other things remaining equal,
investors are indifferent between short-term and long-term bonds.
investors prefer long-term bonds.
investors prefer short-term bonds.
investors prefer intermediate-term bonds.
The shape of the yield curve is usually:
downward sloping.
flat.
upward sloping.
upward sloping for shorter maturities and downward sloping for longer maturities.
The expectations theory of the term structure assumes:
buyers of bonds prefer bonds with shorter maturities.
buyers of bonds consider bonds of different maturities to be perfect substitutes.
buyers of bonds prefer bonds with longer maturities.
markets for different maturity bonds are completely separate
What will the yield curve look like if future short-term interest rates are expected to rise sharply?
It will steeply slope upward.
It will slightly slope upward.
It will be horizontal.
It will slope downward.
Reduced liquidity of a bond causes the interest rate on that bond
To be higher because it is less widely traded.
To be higher because it is more widely traded.
To be lower because it is less widely traded
To be lower because it is more widely traded
The Segmented Markets theory of term structure suggests that
Interest rates on long-term bonds strongly influence the demand for short-term bonds.
Bonds of different maturities are perfect substitutes for each other.
Investors have no preference for short-term bonds over long-term bonds, or vice versa.
Investors have strong preferences for bonds of a particular maturity
