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1Copyright©2016PearsonEducation,Ltd.EconomicsofMoney,Banking,andFinancialMarkets,11e,GlobalEdition(Mishkin)Chapter6TheRiskandTermStructureofInterestRates6.1RiskStructureofInterestRates1)TheriskstructureofinterestratesisA)thestructureofhowinterestratesmoveovertime.B)therelationshipamonginterestratesofdifferentbondswiththesamematurity.C)therelationshipamongthetermtomaturityofdifferentbonds.D)therelationshipamonginterestratesonbondswithdifferentmaturities.Answer:BAACSB:ReflectiveThinking2)Theriskthatinterestpaymentswillnotbemade,orthatthefacevalueofabondisnotrepaidwhenabondmaturesisA)interestraterisk.B)inflationrisk.C)liquidityrisk.D)defaultrisk.Answer:DAACSB:ApplicationofKnowledge3)BondswithnodefaultriskarecalledA)flowerbonds.B)no-riskbonds.C)default-freebonds.D)zero-riskbonds.Answer:CAACSB:ApplicationofKnowledge4)Whichofthefollowingbondsareconsideredtobedefault-riskfree?A)municipalbondsB)investment-gradebondsC)U.S.TreasurybondsD)junkbondsAnswer:CAACSB:AnalyticalThinking5)U.S.governmentbondshavenodefaultriskbecauseA)theyareissuedinstrictlylimitedquantities.B)thefederalgovernmentcanincreasetaxesorprintmoneytopayitsobligations.C)theyarebackedwithgoldreserves.D)theycanbeexchangedforsilveratanytime.Answer:BAACSB:ReflectiveThinking2Copyright©2016PearsonEducation,Ltd.6)Thespreadbetweentheinterestratesonbondswithdefaultriskanddefault-freebondsiscalledtheA)riskpremium.B)junkmargin.C)bondmargin.D)defaultpremium.Answer:AAACSB:ApplicationofKnowledge7)Iftheprobabilityofabonddefaultincreasesbecausecorporationsbegintosufferlargelosses,thenthedefaultriskoncorporatebondswill________andtheexpectedreturnonthesebondswill________,everythingelseheldconstant.A)decrease;increaseB)decrease;decreaseC)increase;increaseD)increase;decreaseAnswer:DAACSB:ReflectiveThinking8)Abondwithdefaultriskwillalwayshavea________riskpremiumandanincreaseinitsdefaultriskwill________theriskpremium.A)positive;raiseB)positive;lowerC)negative;raiseD)negative;lowerAnswer:AAACSB:ReflectiveThinking9)Ifacorporationbeginstosufferlargelosses,thenthedefaultriskonthecorporatebondwillA)increaseandthebond'sreturnwillbecomemoreuncertain,meaningtheexpectedreturnonthecorporatebondwillfall.B)increaseandthebond'sreturnwillbecomelessuncertain,meaningtheexpectedreturnonthecorporatebondwillfall.C)decreaseandthebond'sreturnwillbecomelessuncertain,meaningtheexpectedreturnonthecorporatebondwillfall.D)decreaseandthebond'sreturnwillbecomelessuncertain,meaningtheexpectedreturnonthecorporatebondwillrise.Answer:AAACSB:ReflectiveThinking3Copyright©2016PearsonEducation,Ltd.10)Ifthepossibilityofadefaultincreasesbecausecorporationsbegintosufferlosses,thenthedefaultriskoncorporatebondswill________,andthebonds'returnswillbecome________uncertain,meaningthattheexpectedreturnonthesebondswilldecrease,everythingelseheldconstant.A)increase;lessB)increase;moreC)decrease;lessD)decrease;moreAnswer:BAACSB:ReflectiveThinking11)Otherthingsbeingequal,anincreaseinthedefaultriskofcorporatebondsshiftsthedemandcurveforcorporatebondstothe________andthedemandcurveforTreasurybondstothe________.A)right;rightB)right;leftC)left;rightD)left;leftAnswer:CAACSB:ReflectiveThinking12)Otherthingsbeingequal,adecreaseinthedefaultriskofcorporatebondsshiftsthedemandcurveforcorporatebondstothe________andthedemandcurveforTreasurybondstothe________.A)right;rightB)right;leftC)left;rightD)left;leftAnswer:BAACSB:ReflectiveThinking13)A(n)________intheriskinessofcorporatebondswill________thepriceofcorporatebondsand________theyieldoncorporatebonds,allelseequal.A)increase;increase;increaseB)increase;decrease;increaseC)decrease;increase;increaseD)decrease;decrease;decreaseAnswer:BAACSB:ReflectiveThinking4Copyright©2016PearsonEducation,Ltd.14)Anincreaseintheriskinessofcorporatebondswill________thepriceofcorporatebondsand________thepriceofTreasurybonds,everythingelseheldconstant.A)increase;increaseB)reduce;reduceC)reduce;increaseD)increase;reduceAnswer:CAACSB:ReflectiveThinking15)Adecreaseintheriskinessofcorporatebondswill________thepriceofcorporatebondsand________thepriceofTreasurybonds,everythingelseheldconstant.A)increase;increaseB)reduce;reduceC)reduce;increaseD)increase;reduceAnswer:DAACSB:ReflectiveThinking16)Anincreaseintheriskinessofcorporatebondswill________theyieldoncorporatebondsand________theyieldonTreasurysecurities,everythingelseheldconstant.A)increase;increaseB)reduce;reduceC)increase;reduceD)reduce;increaseAnswer:CAACSB:ReflectiveThinking17)Adecreaseintheriskinessofcorporatebondswill________theyieldoncorporatebondsand________theyieldonTreasurysecurities,everythingelseheldconstant.A)increase;increaseB)decrease;decreaseC)increase;decreaseD)decrease;increaseAnswer:DAACSB:ReflectiveThinking18)Anincreaseindefaultriskoncorporatebonds________thedemandforthesebonds,but________thedemandfordefault-freebonds,everythingelseheldconstant.A)increases;lowersB)lowers;increasesC)doesnotchange;greatlyincreasesD)moderatelylowers;doesnotchangeAnswer:BAACSB:ReflectiveThinking5Copyright©2016PearsonEducation,Ltd.19)Adecreaseindefaultriskoncor