Quiz 9 b - Quiz PDF

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EC 340, Quiz 9 Name ____________________

ID#_______________________

1. (1 point) During a "flight to quality" the demand for Baa bonds _________________(increases or decreases) compared to Treasury bonds. 2. (1 point) A yield curve describes the _______________(risk or term) structure of interest rates for particular types of bonds. 3. (1 point) When yield curves are flat, long-term interest rates are __________________(above, below, equal to) short-term interest rates. 4. (1 point) A key assumption in the expectations theory is that bonds of different maturities are __________________________(perfect substitutes, partial substitutes, or not substitutes at all). 5. (1 point) The spread between the interest rates on bonds with default risk and defaultfree bonds (with same maturity) is called the _________________(risk or term) premium. 6. (1 point) Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1 percent. The expectations theory of the term structure predicts that the current interest rate on 3-year bond is _2__ percent. 7. (1 point) According to the expectations theory of the term structure, when the shortterm interest rates are expected to rise in the future, the yield curve is _______________________(upward sloping, flat, or downward sloping). 8. (1 point) According to the liquidity premium theory of the term structure, a slightly upward sloping yield curve indicates that short-term interest rates are expected to __________________________(rise, remain unchanged, decline moderately, or decline sharply) in the future. 9. (1 point) The __________________________(segmented markets, expectations, or liquidity premium) theory of the term structure of interest rates states that markets for different-maturity bonds are completely separate and segmented. 10. (1 point) Typically, yield curves are _____________________(upward sloping, downward sloping, or flat). answer 1. decrease 2. term 3. equal to 4. perfect substitutes

5. risk 6. 2 7. upward sloping 8. remain unchanged 9. segmented markets 10. Upward sloping...