Practice Quiz for Chapter 61. 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; leftc. left; right d. left; left2. Which of the following long-term bonds has the highest interest rate?a. corporate Baa bonds b. U.S. Treasury bondsc. corporate Aaa bonds d. municipal bonds3. Which of the following statements are true?a. A liquid asset is one that can be quickly and cheaply converted into cash.b. The demand for a bond declines when it becomes less liquid, decreasing the interest rate spread between it and relatively more liquid bonds.c. The differences in bond interest rates reflect differences in default risk only.d. The corporate bond market is the most liquid bond market.4. An increase in the liquidity of corporate bonds will ____________ the price of corporate bonds and _________ the yield of Treasury bonds, everything else held constant.a. increase; increase b. reduce; reducec. increase; reduce d. reduce; increase5. Everything else held constant, an increase in marginal tax rates would likely have the effect of ___________ the demand for municipal bonds and _______ the demand for U.S. Treasury bonds.a. increasing; increasing b. increasing; decreasingc. decreasing; increasing d. decreasing; decreasing6. Everything else held constant, the interest rate on municipal bonds rises relative to the interest rate on Treasury bonds whena. income tax rates are lowered.b. income tax rates are raised.c. municipal bonds become more widely traded.d. corporate bonds become riskier.7. Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1 percent. The expectations theory of the term structure predicts that the current interest rate on 3-year bonds isa. 1 percent. b. 2 percent.c. 3 percent. d. 4. percent.8. If 1-year interest rates for the next three years are expected to be 4, 2, and 3 percent, and the 3-year term premium is 1 percent, then the 3-year bond rate will bea. 1 percent. b. 2 percent.b. 3 percent. d. 4 percent.9. A steeply upward sloping yield curve indicates that short-term interest rates are expected to a. rise in the future. b. remain unchanged in the future.c. decline moderately in the future. d. decline sharply in the future.10. An inverted yield curve predicts that short-term interest ratesa. are expected to rise in the future.b. will rise and then fall in the future.c. will remain unchanged in the future.d. will fall in the future.Answers to practice quiz for chapter 6.1. C2. A3. A4. A5. B6. A7. B8. D9. A10.
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