Exam Name MULTIPLE CHOICE Choose the one alternative that best completes the statement or answers the question 1 A bond with default risk will always have a risk premium and an increase in its default risk will the risk premium 1 A positive raise B negative raise C positive lower D negative lower 2 A decrease in the riskiness of corporate bonds will the yield on corporate bonds and the yield on Treasury securities everything else held constant 2 A decrease increase B decrease decrease C increase decrease D increase increase 3 Which of the following securities has the lowest interest rate 3 A Investment grade bonds B Junk bonds C U S Treasury bonds D Corporate Baa bonds 4 Everything else held constant if income tax rates were lowered then 4 A the price of Treasury bonds would fall B the interest rate on municipal bonds would rise C the interest rate on municipal bonds would fall D the interest rate on Treasury bonds would rise 5 A plot of the interest rates on default free government bonds with different terms to maturity is called 5 A a yield curve B a risk structure curve C an interest rate curve D a default free curve 6 If the expected path of 1 year interest rates over the next four years is 5 percent 4 percent 2 percent and 1 percent then the expectations theory predicts that today s interest rate on the four year bond is 6 A 1 percent B 2 percent C 3 percent D 4 percent 7 According to the liquidity premium theory of the term structure a steeply upward sloping yield curve indicates that short term interest rates are expected to 7 A rise in the future B remain unchanged in the future C decline moderately in the future D decline sharply in the future 8 If 1 year interest rates for the next five years are expected to be 4 2 5 4 and 5 percent and the 5 year term premium is 1 percent than the 5 year bond rate will be 8 A 2 percent B 3 percent C 4 percent D 5 percent 9 If the yield curve is flat for short maturities and then slopes downward for longer maturities the liquidity premium theory assuming a mild preference for shorter term bonds indicates that the market is predicting 9 A constant short term interest rates in the near future and a decline further out in the future B a decline in short term interest rates in the near future and a rise further out in the future C a rise in short term interest rates in the near future and a decline further out in the future D a decline in short term interest rates in the near future and an even steeper decline further out in the future 10 When the yield curve is flat or downward sloping it suggest that the economy is more likely to enter 10 A an expansion B a period of increasing output C a recession D a boom time 1 A 2 A 3 C 4 B 5 A 6 C 7 A 8 D 9 D 10 C
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