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Test Bank For Economics of Money, Banking, and Financial Markets,10th Edition by Frederic S. Mishkin Test Bank

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Economics of Money, Banking, and Financial Markets,10th Edition by Frederic S. Mishkin Test Bank

Economics of Money, Banking, and Fin. Markets, 10e (Mishkin)

Chapter 6   The Risk and Term Structure of Interest Rates

 

6.1   Risk Structure of Interest Rates

 

1) The risk structure of interest rates is

  1. A) the structure of how interest rates move over time.
  2. B) the relationship among interest rates of different bonds with the same maturity.
  3. C) the relationship among the term to maturity of different bonds.
  4. D) the relationship among interest rates on bonds with different maturities.

Answer:  B

Ques Status:  Previous Edition

AACSB:  Reflective thinking skills

 

2) 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

  1. A) interest rate risk.
  2. B) inflation risk.
  3. C) moral hazard.
  4. D) default risk.

Answer:  D

Ques Status:  Previous Edition

 

3) Bonds with no default risk are called

  1. A) flower bonds.
  2. B) no-risk bonds.
  3. C) default-free bonds.
  4. D) zero-risk bonds.

Answer:  C

Ques Status:  Previous Edition

 

4) Which of the following bonds are considered to be default-risk free?

  1. A) Municipal bonds
  2. B) Investment-grade bonds
  3. C) U.S. Treasury bonds
  4. D) Junk bonds

Answer:  C

Ques Status:  Previous Edition

AACSB:  Analytic skills

 

 

5) U.S. government bonds have no default risk because

  1. A) they are backed by the full faith and credit of the federal government.
  2. B) the federal government can increase taxes to pay its obligations.
  3. C) they are backed with gold reserves.
  4. D) they can be exchanged for silver at any time.

Answer:  B

Ques Status:  Previous Edition

AACSB:  Reflective thinking skills

6) The spread between the interest rates on bonds with default risk and default-free bonds is called the

  1. A) risk premium.
  2. B) junk margin.
  3. C) bond margin.
  4. D) default premium.

Answer:  A

Ques Status:  Previous Edition

AACSB:  Analytic skills

 

7) 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.

  1. A) decrease; increase
  2. B) decrease; decrease
  3. C) increase; increase
  4. D) increase; decrease

Answer:  D

Ques Status:  Previous Edition

AACSB:  Reflective thinking skills

 

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

  1. A) positive; raise
  2. B) positive; lower
  3. C) negative; raise
  4. D) negative; lower

Answer:  A

Ques Status:  Previous Edition

AACSB:  Reflective thinking skills

 

 

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

  1. A) increase and the bond’s return will become more uncertain, meaning the expected return on the corporate bond will fall.
  2. B) increase and the bond’s return will become less uncertain, meaning the expected return on the corporate bond will fall.
  3. C) decrease and the bond’s return will become less uncertain, meaning the expected return on the corporate bond will fall.
  4. D) decrease and the bond’s return will become less uncertain, meaning the expected return on the corporate bond will rise.

Answer:  A

Ques Status:  Previous Edition

AACSB:  Reflective thinking skills

10) 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 ________ uncertain, meaning that the expected return on these bonds will decrease, everything else held constant.

  1. A) increase; less
  2. B) increase; more
  3. C) decrease; less
  4. D) decrease; more

Answer:  B

Ques Status:  Previous Edition

AACSB:  Reflective thinking skills

 

11) Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the ________.

  1. A) right; right
  2. B) right; left
  3. C) left; right
  4. D) left; left

Answer:  C

Ques Status:  Previous Edition

AACSB:  Reflective thinking skills

 

12) Other things being equal, a decrease in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the ________.

  1. A) right; right
  2. B) right; left
  3. C) left; right
  4. D) left; left

Answer:  B

Ques Status:  New

AACSB:  Reflective thinking skills

 

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

  1. A) increase; increase; increase
  2. B) increase; decrease; increase
  3. C) decrease; increase; increase
  4. D) decrease; decrease;decrease

Answer:  B

Ques Status:  New

AACSB:  Reflective thinking skills

14) An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant.

  1. A) increase; increase
  2. B) reduce; reduce
  3. C) reduce; increase
  4. D) increase; reduce

Answer:  C

Ques Status:  Previous Edition

AACSB:  Reflective thinking skills

 

15) A decrease in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant.

  1. A) increase; increase
  2. B) reduce; reduce
  3. C) reduce; increase
  4. D) increase; reduce

Answer:  D

Ques Status:  New

AACSB:  Reflective thinking skills

 

16) An increase in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities, everything else held constant.

  1. A) increase; increase
  2. B) reduce; reduce
  3. C) increase; reduce
  4. D) reduce; increase

Answer:  C

Ques Status:  Previous Edition

AACSB:  Reflective thinking skills

 

 

17) A decrease in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities, everything else held constant.

  1. A) increase; increase
  2. B) decrease; decrease
  3. C) increase; decrease
  4. D) decrease; increase

Answer:  D

Ques Status:  New

AACSB:  Reflective thinking skills

 

18) An increase in default risk on corporate bonds ________ the demand for these bonds, but ________ the demand for default-free bonds, everything else held constant.

  1. A) increases; lowers
  2. B) lowers; increases
  3. C) does not change; greatly increases
  4. D) moderately lowers; does not change

Answer:  B

Ques Status:  Previous Edition

AACSB:  Reflective thinking skills

19) A decrease in default risk on corporate bonds ________ the demand for these bonds, and ________ the demand for default-free bonds, everything else held constant.

  1. A) increases; lowers
  2. B) lowers; increases
  3. C) does not change; greatly increases
  4. D) moderately lowers; does not change

Answer:  A

Ques Status:  New

AACSB:  Reflective thinking skills

 

20) As default risk increases, the expected return on corporate bonds ________, and the return becomes ________ uncertain, everything else held constant.

  1. A) increases; less
  2. B) increases; more
  3. C) decreases; less
  4. D) decreases; more

Answer:  D

Ques Status:  Previous Edition

AACSB:  Reflective thinking skills

 

 

21) As default risk decreases, the expected return on corporate bonds ________, and the return becomes ________ uncertain, everything else held constant.

  1. A) increases; less
  2. B) increases; more
  3. C) decreases; less
  4. D) decreases; more

Answer:  A

Ques Status:  New

AACSB:  Reflective thinking skills

 

22) As their relative riskiness ________, the expected return on corporate bonds ________ relative to the expected return on default-free bonds, everything else held constant.

  1. A) increases; increases
  2. B) increases; decreases
  3. C) decreases; decreases
  4. D) decreases; does not change

Answer:  B

Ques Status:  Previous Edition

AACSB:  Reflective thinking skills

 

23) Which of the following statements are true?

  1. A) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds.
  2. B) The expected return on corporate bonds decreases as default risk increases.
  3. C) A corporate bond’s return becomes less uncertain as default risk increases.
  4. D) As their relative riskiness increases, the expected return on corporate bonds increases relative to the expected return on default-free bonds.

Answer:  B

Ques Status:  Previous Edition

AACSB:  Reflective thinking skills

24) Everything else held constant, if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future, the interest rate on corporate bonds will ________ and the interest rate on Treasury securities will ________.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; increase
  4. D) decrease; decrease

Answer:  C

Ques Status:  Previous Edition

AACSB:  Reflective thinking skills

 

 

25) Bonds with relatively high risk of default are called

  1. A) Brady bonds.
  2. B) junk bonds.
  3. C) zero coupon bonds.
  4. D) investment grade bonds.

Answer:  B

Ques Status:  Previous Edition

AACSB:  Analytic skills

 

26) Bonds with relatively low risk of default are called ________ securities and have a rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called ________.

  1. A) investment grade; lower grade
  2. B) investment grade; junk bonds
  3. C) high quality; lower grade
  4. D) high quality; junk bonds

Answer:  B

Ques Status:  Previous Edition

AACSB:  Analytic skills

 

27) Which of the following bonds would have the highest default risk?

  1. A) Municipal bonds
  2. B) Investment-grade bonds
  3. C) U.S. Treasury bonds
  4. D) Junk bonds

Answer:  D

Ques Status:  Previous Edition

AACSB:  Reflective thinking skills

 

28) Which of the following long-term bonds has the highest interest rate?

  1. A) Corporate Baa bonds
  2. B) U.S. Treasury bonds
  3. C) Corporate Aaa bonds
  4. D) Municipal bonds

Answer:  A

Ques Status:  Previous Edition

AACSB:  Reflective thinking skills

29) Which of the following securities has the lowest interest rate?

  1. A) Junk bonds
  2. B) U.S. Treasury bonds
  3. C) Investment-grade bonds
  4. D) Corporate Baa bonds

Answer:  B

Ques Status:  Previous Edition

AACSB:  Reflective thinking skills

 

30) The spread between interest rates on low quality corporate bonds and U.S. government bonds

  1. A) widened significantly during the Great Depression.
  2. B) narrowed significantly during the Great Depression.
  3. C) narrowed moderately during the Great Depression.
  4. D) did not change during the Great Depression.

Answer:  A

Ques Status:  Previous Edition