Risk and Term Structure of Interest Rates

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  • Topic: Bond, Bonds, Yield curve
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  • Published : December 15, 2009
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6.1Risk Structure of Interest Rates
1)
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 term to maturity of different bonds. D)
the relationship among interest rates on bonds with different maturities. 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 A)
interest rate risk.
B)
inflation risk.
C)
moral hazard.
D)
default risk.

3)
Bonds with no default risk are called
A)
flower bonds.
B)
no-risk bonds.
C)
default-free bonds.
D)
zero-risk bonds.
4)
Which of the following bonds are considered to be default-risk free? A)
municipal bonds
B)
investment-grade bonds
C)
U.S. Treasury bonds
D)
junk bonds

5)
U.S. government bonds have no default risk because
A)
they are backed by the full faith and credit of the federal government. B)
the federal government can increase taxes to pay its obligations. C)
they are backed with gold reserves.
D)
they can be exchanged for silver at any time.
6)
The spread between the interest rates on bonds with default risk and default-free bonds is called the A)
risk premium.
B)
junk margin.
C)
bond margin.
D)
default premium.
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. A)

decrease; increase
B)
decrease; decrease
C)
increase; increase
D)
increase; decrease

8)
A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium. A)
positive; raise
B)
positive; lower
C)
negative; raise
D)
negative; lower
9)
If a corporation begins to suffer large losses, then the default risk on the corporate bond will A)
increase and the bond's return will become more uncertain, meaning the expected return on the corporate bond will fall. B)
increase and the bond's return will become less uncertain, meaning the expected return on the corporate bond will fall. C)
decrease and the bond's return will become less uncertain, meaning the expected return on the corporate bond will fall. D)
decrease and the bond's return will become less uncertain, meaning the expected return on the corporate bond will rise. 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. A)

increase; less
B)
increase; more
C)
decrease; less
D)
decrease; more

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 ________. A)

right; right
B)
right; left
C)
left; right
D)
left; left
12)
An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant. A)
increase; increase
B)
reduce; reduce
C)
reduce; increase
D)
increase; reduce
13)
An increase in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities,...
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