Eco 210 practice problems chapter 6 with answers PDF

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Eco210 money and banking Practice problems, ch 6, Professor Goodspeed MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question 1) 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 A) default risk. B) inflation risk. C) interest rate risk. D) liquidity risk. 2) Which of the following bonds are considered to be default risk free? A) investment grade bonds B) U.S. Treasury bonds C) junk bonds D) municipal bonds 3) An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ th price of Treasury bonds, everything else held constant. A) increase; increase B) increase; reduce C) reduce; reduce D) reduce; increase 4) As their relative riskiness ________, the expected return on corporate bonds ________ relative to the expected return on default free bonds, everything else held constant. A) increases; increases B) decreases; decreases C) increases; decreases D) decreases; does not change 5) Bonds with relatively high risk of default are called A) Brady bonds. C) investment grade bonds.

B) junk bonds. D) zero coupon bonds.

6) The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and ar ________ U.S. Treasury bonds. A) taxexempt unlike B) loweryielding than C) less liquid than D) less speculative than 7) Municipal bonds have default risk, yet their interest rates are usually lower than the rates on defaulfree Treasury bonds. This suggests that A) the benefit from the taxexempt status of municipal bonds equals their default risk B) the benefit from the taxexempt status of municipal bonds is less than their default risk C) the benefit from the taxexempt status of municipal bonds exceeds their default risk D) Treasury bonds are not defaultfree. 8) A plot of the interest rates on defaultfree government bonds with different terms to maturity is called A) a yield curve. B) a defaultfree curve. C) a risk structure curve. D) an interestrate curve. 9) The typical shape for a yield curve is A) flat. C) gently upward sloping.

B) mound shaped. D) bowl shaped.

10) According to the expectations theory of the term structure, the interest rate on a long term bond will equal the ________ of the short term interest rates that people expect to occur over the life of the longterm bond. A) multiple B) difference C) sum D) average

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11) If the expected path of one year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five year bond is A) 4 percent. B) 5 percent. C) 6 percent. D) 7 percent. 12) According to the segmented markets theory of the term structure A) investors' strong preferences for short term relative to long term bonds explains why yield curves typically slope downward. B) bonds of one maturity are close substitutes for bonds of other maturities, therefore, interest rates on bond of different maturities move together over time. C) the interest rate for each maturity bond is determined by supply and demand for that maturity bond D) because of the positive term premium, the yield curve will not be observed to be downwardsloping. 13) According to the liquidity premium theory of the term structure A) because of the positive term premium, the yield curve will not be observed to be downward sloping B) the interest rate for each maturity bond is determined by supply and demand for that maturity bond C) because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds o different maturities do not move together over time. D) the interest rate on long term bonds will equal an average of shortterm interest rates that people expect to occur over the life of the longterm bonds plus a term premium. 14) The expectations theory and the segmented markets theory do not explain the facts very well, but they provid the groundwork for the most widely accepted theory of the term structure of interest rates A) the asset market approach. B) the separable markets theory. C) the liquidity premium theory. D) the Keynesian theory 15) The ________ of the term structure states the following: the interest rate on a long term bond will equal an average of shortterm interest rates expected to occur over the life of the longterm bond plus a term premium that responds to supply and demand conditions for that bond. A) expectations theory B) liquidity premium theory C) segmented markets theory D) separable markets theory

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16) The steeply upward sloping yield curve in the figure above indicates that A) shortterm interest rates are expected to fall sharply in the future B) shortterm interest rates are expected to rise in the future C) shortterm interest rates are expected to remain unchanged in the future D) shortterm interest rates are expected to fall moderately in the future

17) The mound shaped yield curve in the figure above indicates that shor term interest rates are expected to A) fall moderately in the near term and rise later on. B) remain unchanged in the near term and fall later on. C) fall sharply in the nearterm and rise later on. D) rise in the nearterm and fall later on. 18) When shortterm interest rates are expected to fall sharply in the future, the yield curve wil A) be flat. B) be inverted. C) slope up. D) be an inverted U shape

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Answer Key Testname: ECO 210 PRACTICE PROBLEMS CHAPTER 6

1) A 2) B 3) D 4) C 5) B 6) C 7) C 8) A 9) C 10) D 11) C 12) C 13) D 14) C 15) B 16) B 17) D 18) B

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