Exam 2 Flashcards
The risk structure of interest rates refers to
the relationship among the interest rates on bonds with the same maturity
When a company whose ability to repay its obligations in full is uncertain borrows funds
it must offer investors higher yields to compensate them for the risk they take in buying their bonds or making loans
Default risk
is the probability that a borrower will not pay in full the promised interest or principal
US Treasury securities
are considered to be default risk free because the gov can print money and raise taxes
The default risk premium is most often measured
as the difference between the yield on the security and the yield on a US Treasury security of the same maturity
Bond ratings
are published by private bond rating agencies
Junk (high risk) bonds
One can profit by owning them if market perceptions of their default risk declines
A flight to quality refers to a shift by savers from:
low-quality bonds and into high-quality bonds
The creation of the ratings for debt securities has
lowered returns on corporate bonds
If the federal gov replaced the current income tax with a federal sales tax
the prices of Treasury bonds would rise, while the prices of municipal bonds would fall
What would be considered an investment grade rating?
BBB-
In the bond market, the issuer is considered to be
the borrower
If there is an excess supply of bonds at a given interest rate, then
the price of bonds will fall
If there is an excess demand for bonds at a given price of bonds, then
the interest rate will fall
As wealth increases in the economy, savers are willing to
buy more bonds at any given price
If the expected gains on stocks rise, while the expected returns on bonds do not change, then
the demand curve for bonds will shift to the left
Suppose congress passes a law that prohibits mutual funds from holding corporate bonds. The likely result in the debt would be an
increase in the equilibrium interest rate
An increase in the corporate profits tax is likely to cause
the equilibrium interest rate to fall and the equilibrium price of bonds to rise
If the gov were to increase taxes while holding expenditures constant, we would expect
the bond supply curve to shift left and the equilibrium interest rate will fall
Everything else held constant, if the expected return on US Treasury bonds falls from 10 to 9 percent and the expected return on GE stock falls from 7 to 5 percent, then the expected return of holding GE stock ____ relative to US treasury bonds and the demand for GE stock _____.
falls: rises
If fluctuations in the stock market become less volatile, then, other things equal, the demand for long-term bonds _____ and the demand for stocks _____
decreases: increases
The supply curve for bonds has the usual upward slope, indicating that as the price _____, ceteris paribus, the _____ increases.
rises: quantity supplied
