Financial Markets and Institutions, 8e (Mishkin)
1) The term structure of interest rates is
A) the relationship among interest rates of different bonds with the same risk and maturity.
B) the structure of how interest rates move over time.
C) the relationship among the terms to maturity of different bonds from different issuers.
D) the relationship among interest rates on bonds with different maturities but similar risk.
2) The risk structure of interest rates is
A) the structure of how interest rates move over time.
B) the relationship among interest rates of different bonds with the same maturity.
C) the relationship among the terms to maturity of different bonds.
D) the relationship among interest rates on bonds with different maturities.
3) Which of the following long-term bonds should have the lowest interest rate?
A) Corporate Baa bonds
B) U.S. Treasury bonds
C) Corporate Aaa bonds
D) Municipal bonds
4) Which of the following long-term bonds should have the highest interest rate?
A) Corporate Baa bonds
B) U.S. Treasury bonds
C) Corporate Aaa bonds
D) Municipal bonds
5) The risk premium on corporate bonds becomes smaller if
A) the riskiness of corporate bonds increases.
B) the liquidity of corporate bonds increases.
C) the liquidity of corporate bonds decreases.
D) the riskiness of corporate bonds decreases.
E) either B or D of the above occur.
6) Bonds with relatively low risk of default are called
A) zero coupon bonds.
B) junk bonds.
C) investment-grade bonds.
D) none of the above.
7) Bonds with relatively high risk of default are called
A) Brady bonds.
B) junk bonds.
C) zero coupon bonds.
D) investment-grade bonds.
8) A corporation suffering big losses might be more likely to suspend interest payments on its
bonds, thereby
A) raising the default risk and causing the demand for its bonds to rise.
B) raising the default risk and causing the demand for its bonds to fall.
C) lowering the default risk and causing the demand for its bonds to rise.
D) lowering the default risk and causing the demand for its bonds to fall.
9) (I) If a corporation suffers big losses, the demand for its bonds will rise because of the higher
interest rates the firm must pay.
(II) The spread between the interest rates on bonds with default risk and default-free bonds is
called the risk premium.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
10) Holding everything else constant, if a corporation begins to suffer large losses, then the
default risk on its bonds will ________ and the expected return on those bonds will ________.
A) increase: increase
B) decrease; increase
C) increase; decrease
D) decrease; decrease
11) Holding everything else the same, if a corporation’s earnings rise, then the default risk on its
bonds will ________ and the expected return on those bonds will ________.
A) increase; decrease
B) decrease; decrease
C) increase; increase
D) decrease; increase
12) If a corporation begins to suffer large losses, then the default risk on its bonds will ________
and the equilibrium interest rate on these bonds will ________.
A) increase; decrease
B) decrease; increase
C) increase; increase
D) decrease; decrease
13) If a corporation’s earnings rise, then the default risk on its bonds will ________ and the
equilibrium interest rate on these bonds will ________.
A) increase; decrease
B) decrease; decrease
C) increase; increase
D) decrease; increase
14) When the default risk on corporate bonds decreases, other things equal, the demand curve for
corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the
________.
A) right; right
B) right; left
C) left; left
D) left; right
15) (I) An increase in default risk on corporate bonds shifts the demand curve for corporate
bonds to the right.
(II) An increase in default risk on corporate bonds shifts the demand curve for Treasury bonds to
the left.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
16) (I) An increase in default risk on corporate bonds shifts the demand curve for corporate
bonds to the left. (II) An increase in default risk on corporate bonds shifts the demand curve for
Treasury bonds to the right.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
17) The spread between interest rates on low-quality corporate bonds and U.S. government
bonds ________ during the Great Depression.
A) was reversed
B) narrowed significantly
C) widened significantly
D) did not change
18) As a result of the subprime collapse, the demand for low -quality corporate bonds ________,
the demand for high-quality Treasury bonds ________, and the risk spread ________.
A) increased; decreased; was unchanged
B) decreased; increased; increased
C) increased; decreased; decreased
D) decreased; increased; was unchanged
19) Moody’s and Standard and Poor’s are agencies that
A) help investors collect when corporations default on their bonds.
B) advise municipal bond issuers on the tax exempt status of their bonds.
C) produce information about the probability of default on corporate bonds.
D) maintain liquid markets for corporate bonds.
20) If Moody’s or Standard and Poor’s downgrades its rating on a corporate bond, the demand for
the bond ________ and its yield ________.
A) increases; decreases
B) decreases; increases
C) increases; increases
D) decreases; decreases
21) Corporate bonds are not as liquid as government bonds because
A) fewer bonds for any one corporation are traded, making them more costly to sell.
B) the corporate bond rating must be calculated each time they are traded.
C) corporate bonds are not callable.
D) all of the above.
E) only A and B of the above.
22) (I) The risk premium widens as the default risk on corporate bonds increases.
(II) The risk premium widens as corporate bonds become less liquid.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
23) When the corporate bond market becomes less liquid, other things equal, the demand curve
for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the
________.
A) right; right
B) right; left
C) left; left
D) left; right
24) When the corporate bond market becomes more liquid, other things equal, the demand curve
for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the
________.
A) right; right
B) right; left
C) left; left
D) left; right
25) (I) If a corporate bond becomes less liquid, the demand for the bond will fall, causing the
interest rate to rise.
(II) If a corporate bond becomes less liquid, the demand for Treasury bonds does not change.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
26) (I) If a corporate bond becomes less liquid, the interest rate on the bond will fall.
(II) If a corporate bond becomes less liquid, the interest rate on Treasury bonds will fall.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
27) If income tax rates were lowered, then
A) the interest rate on municipal bonds would fall.
B) the interest rate on Treasury bonds would rise.
C) the interest rate on municipal bonds would rise.
D) the price of Treasury bonds would fall.
28) If income tax rates rise, then
A) the prices of municipal bonds will fall.
B) the prices of Treasury bonds will rise.
C) the interest rate on Treasury bonds will rise.
D) the interest rate on municipal bonds will rise.
29) An increase in marginal tax rates would likely have the effect of ________ the demand for
municipal bonds and ________ the demand for U.S. government bonds.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing
30) A decrease in marginal tax rates would likely have the effect of ________ the demand for
municipal bonds and ________ the demand for U.S. government bonds.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing
31) Which of the following statements are true?
A) Because coupon payments on municipal bonds are exempt from federal income tax, the
expected after-tax return on them will be higher for individuals in higher income tax brackets.
B) An increase in tax rates will increase the demand for municipal bonds, lowering their interest
rates.
C) Interest rates on municipal bonds will be lower than on comparable bonds without the tax
exemption.
D) All of the above are true statements.
E) Only A and B are true statements.
32) Which of the following statements are true?
A) Because coupon payments on municipal bonds are exempt from federal income tax, the
expected after-tax return on them will be higher for individuals in higher income tax brackets.
B) An increase in tax rates will increase the demand for Treasury bonds, lowering their interest
rates.
C) Interest rates on municipal bonds will be higher than on comparable bonds without the tax
exemption.
D) Only A and B are true statements.
33) When a municipal bond is given tax-free status, the demand for municipal bonds shifts
________, causing the interest rate on the bond to ________.
A) leftward; rise
B) leftward; fall
C) rightward; rise
D) rightward; fall
34) When a municipal bond is given tax-free status, the demand for Treasury bonds shifts
________, and the interest rate on Treasury bonds ________.
A) leftward; rises
B) leftward; falls
C) rightward; rises
D) rightward; falls
35) If municipal bonds were to lose their tax-free status, then the demand for Treasury bonds
would shift ________, and the interest rate on Treasury bonds would ________.
A) rightward; fall
B) rightward; rise
C) leftward; fall
D) leftward; rise
36) The Bush tax cut passed in 2001 reduces the top income tax bracket from 39 percent to 35
percent over the next ten years. As a result of this tax cut, the demand for municipal bonds
should shift to the ________ and the interest rate on municipal bonds should ________.
A) right; decline
B) right; increase
C) left; decline
D) left; increase
37) The relationship among interest rates on bonds with identical default risk but different
maturities is called the
A) time-risk structure of interest rates.
B) liquidity structure of interest rates.
C) yield curve.
D) bond demand curve.
38) Yield curves can be classified as
A) upward-sloping.
B) downward-sloping.
C) flat.
D) all of the above.
E) only A and B of the above.
39) Typically, yield curves are
A) gently upward-sloping.
B) gently downward-sloping.
C) flat.
D) bowl shaped.
E) mound shaped.
40) When yield curves are steeply upward-sloping,
A) long-term interest rates are above short-term interest rates.
B) short-term interest rates are above long-term interest rates.
C) short-term interest rates are about the same as long-term interest rates.
D) medium-term interest rates are above both short-term and long-term interest rates.
E) medium-term interest rates are below both short-term and long-term interest rates.