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1Copyright©2012PearsonEducation,Inc.FinancialMarketsandInstitutions,7e(Mishkin)Chapter5HowDoRiskandTermStructureAffectInterestRates?5.1MultipleChoice1)ThetermstructureofinterestratesisA)therelationshipamonginterestratesofdifferentbondswiththesameriskandmaturity.B)thestructureofhowinterestratesmoveovertime.C)therelationshipamongthetermstomaturityofdifferentbondsfromdifferentissuers.D)therelationshipamonginterestratesonbondswithdifferentmaturitiesbutsimilarrisk.Answer:D2)TheriskstructureofinterestratesisA)thestructureofhowinterestratesmoveovertime.B)therelationshipamonginterestratesofdifferentbondswiththesamematurity.C)therelationshipamongthetermstomaturityofdifferentbonds.D)therelationshipamonginterestratesonbondswithdifferentmaturities.Answer:B3)Whichofthefollowinglong-termbondsshouldhavethelowestinterestrate?A)CorporateBaabondsB)U.S.TreasurybondsC)CorporateAaabondsD)MunicipalbondsAnswer:D4)Whichofthefollowinglong-termbondsshouldhavethehighestinterestrate?A)CorporateBaabondsB)U.S.TreasurybondsC)CorporateAaabondsD)MunicipalbondsAnswer:A5)TheriskpremiumoncorporatebondsbecomessmallerifA)theriskinessofcorporatebondsincreases.B)theliquidityofcorporatebondsincreases.C)theliquidityofcorporatebondsdecreases.D)theriskinessofcorporatebondsdecreases.E)eitherBorDoftheaboveoccur.Answer:E2Copyright©2012PearsonEducation,Inc.6)BondswithrelativelylowriskofdefaultarecalledA)zerocouponbonds.B)junkbonds.C)investment-gradebonds.D)noneoftheabove.Answer:C7)BondswithrelativelyhighriskofdefaultarecalledA)Bradybonds.B)junkbonds.C)zerocouponbonds.D)investment-gradebonds.Answer:B8)Acorporationsufferingbiglossesmightbemorelikelytosuspendinterestpaymentsonitsbonds,therebyA)raisingthedefaultriskandcausingthedemandforitsbondstorise.B)raisingthedefaultriskandcausingthedemandforitsbondstofall.C)loweringthedefaultriskandcausingthedemandforitsbondstorise.D)loweringthedefaultriskandcausingthedemandforitsbondstofall.Answer:B9)(I)Ifacorporationsuffersbiglosses,thedemandforitsbondswillrisebecauseofthehigherinterestratesthefirmmustpay.(II)Thespreadbetweentheinterestratesonbondswithdefaultriskanddefault-freebondsiscalledtheriskpremium.A)(I)istrue,(II)false.B)(I)isfalse,(II)true.C)Botharetrue.D)Botharefalse.Answer:B10)Holdingeverythingelseconstant,ifacorporationbeginstosufferlargelosses,thenthedefaultriskonitsbondswill________andtheexpectedreturnonthosebondswill________.A)increase:increaseB)decrease;increaseC)increase;decreaseD)decrease;decreaseAnswer:C3Copyright©2012PearsonEducation,Inc.11)Holdingeverythingelsethesame,ifacorporation'searningsrise,thenthedefaultriskonitsbondswill________andtheexpectedreturnonthosebondswill________.A)increase;decreaseB)decrease;decreaseC)increase;increaseD)decrease;increaseAnswer:D12)Ifacorporationbeginstosufferlargelosses,thenthedefaultriskonitsbondswill________andtheequilibriuminterestrateonthesebondswill________.A)increase;decreaseB)decrease;increaseC)increase;increaseD)decrease;decreaseAnswer:C13)Ifacorporation'searningsrise,thenthedefaultriskonitsbondswill________andtheequilibriuminterestrateonthesebondswill________.A)increase;decreaseB)decrease;decreaseC)increase;increaseD)decrease;increaseAnswer:B14)Whenthedefaultriskoncorporatebondsdecreases,otherthingsequal,thedemandcurveforcorporatebondsshiftstothe________andthedemandcurveforTreasurybondsshiftstothe________.A)right;rightB)right;leftC)left;leftD)left;rightAnswer:B15)(I)Anincreaseindefaultriskoncorporatebondsshiftsthedemandcurveforcorporatebondstotheright.(II)AnincreaseindefaultriskoncorporatebondsshiftsthedemandcurveforTreasurybondstotheleft.A)(I)istrue,(II)false.B)(I)isfalse,(II)true.C)Botharetrue.D)Botharefalse.Answer:D4Copyright©2012PearsonEducation,Inc.16)(I)Anincreaseindefaultriskoncorporatebondsshiftsthedemandcurveforcorporatebondstotheleft.(II)AnincreaseindefaultriskoncorporatebondsshiftsthedemandcurveforTreasurybondstotheright.A)(I)istrue,(II)false.B)(I)isfalse,(II)true.C)Botharetrue.D)Botharefalse.Answer:C17)Thespreadbetweeninterestratesonlow-qualitycorporatebondsandU.S.governmentbonds________duringtheGreatDepression.A)wasreversedB)narrowedsignificantlyC)widenedsignificantlyD)didnotchangeAnswer:C18)Asaresultofthesubprimecollapse,thedemandforlow-qualitycorporatebonds________,thedemandforhigh-qualityTreasurybonds________,andtheriskspread________.A)increased;decreased;wasunchangedB)decreased;increased;increasedC)increased;decreased;decreasedD)decreased;increased;wasunchangedAnswer:B19)Moody'sandStandardandPoor'sareagenciesthatA)helpinvestorscollectwhencorporationsdefaultontheirbonds.B)advisemunicipalbondissuersonthetaxexemptstatusoftheirbonds.C)produceinformationabouttheprobabilityofdefaultoncorporatebonds.D)maintainliquidmarketsforcorporatebonds.Answer:C20)IfMoody'sorStandardandPoor'sdowngradesitsratingonacorporatebond,thedemandforthebond________anditsyield________.A)increases;decreasesB)decreases;increasesC)increases;increasesD)decreases;decreasesAnswer:B5Copyright©2012PearsonEducation,Inc.21)CorporatebondsarenotasliquidasgovernmentbondsbecauseA)fewe