Ch 7 sb

Question 1

When there is an increase in some interest rates and a decrease in others, it is called ______.

Answer 1

interest rate spread

Question 2

Bond rating services are used to

Answer 2

likelihood that the bondholder will be repaid

Question 3

Which of the following contributed to the subprime mortgage crisis?

Answer 3

Poor income documentation

Relaxed lending standards

Low down payments

Question 4

A loan made to someone with a low credit score, high LTV, and insufficient documentation is called _____.

Answer 4

a subprime loan

Question 5

Interest rate spreads are described as

Answer 5

increase and decrease in some interest rates

Question 6

Which of the following is true about the subprime mortgage crisis?

Answer 6

lenders assumed that the housing prices would rise

Question 7

Speculative-grade commercial paper

Answer 7

was originally issued as prime-grade.

Question 8

When we say that U.S. Treasuries act as benchmark bonds we mean that yields on other bonds are measured in terms of the _____________ over Treasuries.

Answer 8

spread

Question 9

Data on the risk structure of interest rates in the US indicates that the majority of fluctuations in yields over time come from fluctuations in ______.

Answer 9

treasury yields

Question 10

Consider two bonds that are completely identical, except interest income on Bond A is federally taxed while interest income on Bond B is not. If Bond A pays an 8% yield and the investor has a 30% tax rate, what will the yield be on Bond B, rounded to one decimal place?

Answer 10

` A tax-exempt bond pays a yield of the taxable bond yield times (1 – tax rate). Therefore, Bond B will pay 8% × (1 – 0.3) = 5.6%.

Question 11

Using U.S. Treasuries data, a graph of the risk structure of interest rates ______ the prediction that lower-rated bonds pay higher yields and ______ the prediction that various interest rates move together.

Answer 11

supports, supports

Question 12

The term structure of interest rates describes the relationship between the yield on a security and its ______.

Answer 12

time to maturity

Question 13

Investors tend to base decisions on

Answer 13

after tax yield

Question 14

The expectations hypothesis of the term structure of interest rates assumes perfect certainty about present and future yields. This certainty implies that

Answer 14

short-term and long-term bonds will be perfect substitutes for each other.

Question 15

The term structure of interest rates refers to the relationship among bonds with the same risk, but different

Answer 15

maturity dates

Question 16

The yield curve graphically depicts the _______ structure of interest rates and has ______ on its horizontal axis.

Answer 16

term, time to maturity

Question 17

According to the expectations hypothesis of the term structure of interest rates, an upward-sloping yield curve indicates that investors expect

Answer 17

short term yields to rise

Question 18

According to the expectations hypothesis of the term structure of interest rates

Answer 18

the average of current and future short-term yields will equal the current long-term yield over the same period.

Question 19

When interest rates are expected to rise,

Answer 19

the yield curve will slope up.

long-term interest rates are higher than short-term interest rates.

Question 20

According to the liquidity premium theory of the term structure of interest rates, today’s long-term yield should equal

Answer 20

the average of short-term yields over the same period plus a risk premium.

Question 21

As economic conditions deteriorate, the lower the initial grade of the bond,

Answer 21

the more the default-risk premium rises.

the spread between U.S Treasury bonds and Junk bonds widens.

Question 22

a term spread

Answer 22

the difference between 10-year and 3-month yields.