Q&A Hero

Q: Which of the following securities has the lowest interest rate? A. junk bonds B. U.S. Treasury bonds C. investment-grade bonds D. corporate Baa bonds

Q: Which of the following long-term bonds has the highest interest rate? A. corporate Baa bonds B. U.S. Treasury bonds C. corporate Aaa bonds D. municipal bonds

Q: Which of the following bonds would have the highest default risk? A. municipal bonds B. investment-grade bonds C. U.S. Treasury bonds D. junk bonds

Q: Bonds with relatively low risk of default are called ________ securities and have a rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called ________. A. investment grade; lower grade B. investment grade; junk bonds C. high quality; lower grade D. high quality; junk bonds

Q: Junk bonds, bonds with a low bond rating, are also known as A. high-yield bonds. B. investment grade bonds. C. high quality bonds. D. zero-coupon bonds.

Q: Bonds with relatively high risk of default are called A. Brady bonds. B. junk bonds. C. zero coupon bonds. D. investment grade bonds.

Q: Everything else held constant, if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future, the interest rate on corporate bonds will ________ and the interest rate on Treasury securities will ________. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease

Q: Which of the following statements are TRUE? A. A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. B. The expected return on corporate bonds decreases as default risk increases. C. A corporate bond's return becomes less uncertain as default risk increases. D. As their relative riskiness increases, the expected return on corporate bonds increases relative to the expected return on default-free bonds.

Q: As their relative riskiness ________, the expected return on corporate bonds ________ relative to the expected return on default-free bonds, everything else held constant. A. increases; increases B. increases; decreases C. decreases; decreases D. decreases; does not change

Q: As default risk decreases, the expected return on corporate bonds ________, and the return becomes ________ uncertain, everything else held constant. A. increases; less B. increases; more C. decreases; less D. decreases; more

Q: As default risk increases, the expected return on corporate bonds ________, and the return becomes ________ uncertain, everything else held constant. A. increases; less B. increases; more C. decreases; less D. decreases; more

Q: A decrease in default risk on corporate bonds ________ the demand for these bonds, and ________ the demand for default-free bonds, everything else held constant. A. increases; lowers B. lowers; increases C. does not change; greatly increases D. moderately lowers; does not change

Q: An increase in default risk on corporate bonds ________ the demand for these bonds, but ________ the demand for default-free bonds, everything else held constant. A. increases; lowers B. lowers; increases C. does not change; greatly increases D. moderately lowers; does not change

Q: A decrease in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities, everything else held constant. A. increase; increase B. decrease; decrease C. increase; decrease D. decrease; increase

Q: An increase in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities, everything else held constant. A. increase; increase B. reduce; reduce C. increase; reduce D. reduce; increase

Q: A decrease in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant. A. increase; increase B. reduce; reduce C. reduce; increase D. increase; reduce

Q: An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant. A. increase; increase B. reduce; reduce C. reduce; increase D. increase; reduce

Q: A(n) ________ in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds, all else equal. A. increase; increase; increase B. increase; decrease; increase C. decrease; increase; increase D. decrease; decrease;decrease

Q: Other things being equal, a decrease 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; left C. left; right D. left; left

Q: 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; left C. left; right D. left; left

Q: If the possibility of a default increases because corporations begin to suffer losses, then the default risk on corporate bonds will ________, and the bonds' returns will become ________ uncertain, meaning that the expected return on these bonds will decrease, everything else held constant. A. increase; less B. increase; more C. decrease; less D. decrease; more

Q: If a corporation begins to suffer large losses, then the default risk on the corporate bond will A. increase and the bond's return will become more uncertain, meaning the expected return on the corporate bond will fall. B. increase and the bond's return will become less uncertain, meaning the expected return on the corporate bond will fall. C. decrease and the bond's return will become less uncertain, meaning the expected return on the corporate bond will fall. D. decrease and the bond's return will become less uncertain, meaning the expected return on the corporate bond will rise.

Q: A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium. A. positive; raise B. positive; lower C. negative; raise D. negative; lower

Q: If the probability of a bond default increases because corporations begin to suffer large losses, then the default risk on corporate bonds will ________ and the expected return on these bonds will ________, everything else held constant. A. decrease; increase B. decrease; decrease C. increase; increase D. increase; decrease

Q: The spread between the interest rates on bonds with default risk and default-free bonds is called the A. risk premium. B. junk margin. C. bond margin. D. default premium.

Q: U.S. government bonds have no default risk because A. they are issued in strictly limited quantities. B. the federal government can increase taxes or print money to pay its obligations. C. they are backed with gold reserves. D. they can be exchanged for silver at any time.

Q: Which of the following bonds are considered to be default-risk free? A. municipal bonds B. investment-grade bonds C. U.S. Treasury bonds D. junk bonds

Q: Bonds with no default risk are called A. flower bonds. B. no-risk bonds. C. default-free bonds. D. zero-risk bonds.

Q: The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is A. interest rate risk. B. inflation risk. C. liquidity risk. D. default risk.

Q: The risk structure of interest rates is A. the structure of how interest rates move over time. B. the relationship among interest rates of different bonds with the same maturity. C. the relationship among the term to maturity of different bonds. D. the relationship among interest rates on bonds with different maturities.

Q: If prices in the bond market become more volatile, everything else held constant, the demand curve for bonds shifts ________ and interest rates ________. A. left; rise B. left; fall C. right; rise D. right; fall

Q: If stock prices are expected to climb next year, everything else held constant, the ________ curve for bonds shifts ________ and the interest rate ________. A. demand; left; rises B. demand; right; rises C. demand; left; falls D. supply; left; rises

Q: Everything else held constant, when the government has higher budget deficits A. the demand curve for bonds shifts to the left and the interest rate rises. B. the demand curve for bonds shifts to the left and the interest rate falls. C. the supply curve for bonds shifts to the right and the interest rate falls. D. the supply curve for bonds shifts to the right and the interest rate rises.

Q: Everything else held constant, when real estate prices are expected to decrease A. the demand curve for bonds shifts to the left and the interest rate rises. B. the demand curve for bonds shifts to the left and the interest rate falls. C. the demand curve for bonds shifts to the right and the interest rate falls. D. the supply curve for bonds shifts to the right and the interest rate falls.

Q: Everything else held constant, when prices in the art market become more uncertain A. the demand curve for bonds shifts to the left and the interest rate rises. B. the demand curve for bonds shifts to the left and the interest rate falls. C. the demand curve for bonds shifts to the right and the interest rate falls. D. the supply curve for bonds shifts to the right and the interest rate falls.

Q: If people expect real estate prices to increase significantly, the ________ curve for bonds will shift to the ________, everything else held constant. A. demand; right B. demand; left C. supply; left D. supply; right

Q: When the prices of rare coins become volatile, the ________ curve for bonds shifts to the ________, everything else held constant. A. demand; right B. demand; left C. supply; right D. supply; left

Q: A decrease in the brokerage commissions in the housing market from 6% to 5% of the sales price will shift the ________ curve for bonds to the ________, everything else held constant. A. demand; right B. demand; left C. supply; right D. supply; left

Q: When the government has a surplus, as occurred in the late 1990s, the ________ curve of bonds shifts to the ________, everything else held constant. A. supply; right B. supply; left C. demand; right D. demand; left

Q: The interest rate falls when either the demand for bonds ________ or the supply of bonds ________. A. increases; increases B. increases; decreases C. decreases; decreases D. decreases; increases

Q: When the interest rate changes, A. the demand curve for bonds shifts to the right. B. the demand curve for bonds shifts to the left. C. the supply curve for bonds shifts to the right. D. it is because either the demand or the supply curve has shifted.

Q: In the 1990s Japan had the lowest interest rates in the world due to a combination of A. inflation and recession. B. deflation and expansion. C. inflation and expansion. D. deflation and recession.

Q: Deflation causes the demand for bonds to ________, the supply of bonds to ________, and bond prices to ________, everything else held constant. A. increase; increase; increase B. increase; decrease; increase C. decrease; increase; increase D. decrease; decrease; increase

Q: When an economy grows out of a recession, normally the demand for bonds ________ and the supply of bonds ________, everything else held constant. A. increases; increases B. increases; decreases C. decreases; decreases D. decreases; increases

Q: When the economy slips into a recession, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant. A. increases; increases; rises B. decreases; decreases; falls C. increases; decreases; falls D. decreases; increases; rises

Q: Everything else held constant, during a business cycle expansion, the supply of bonds shifts to the ________ as businesses perceive more profitable investment opportunities, while the demand for bonds shifts to the ________ as a result of the increase in wealth generated by the economic expansion. A. right; left B. right; right C. left; left D. left; right

Q: The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ________ as the expected rate of inflation ________, everything else held constant. A. rise; increases B. rise; stabilizes C. fall; stabilizes D. fall; increases

Q: Everything else held constant, when the inflation rate is expected to rise, interest rates will ________; this result has been termed the ________. A. fall; Keynes effect B. fall; Fisher effect C. rise; Keynes effect D. rise; Fisher effect

Q: When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant. A. increases; increases; rises B. decreases; decreases; falls C. increases; decreases; falls D. decreases; increases; rises

Q: When the inflation rate is expected to increase, the ________ for bonds falls, while the ________ curve shifts to the right, everything else held constant. A. demand; demand B. demand; supply C. supply; demand D. supply; supply

Q: Factors that can cause the supply curve for bonds to shift to the right include A. an expansion in overall economic activity. B. a decrease in expected inflation. C. a decrease in government deficits. D. a business cycle recession.

Q: Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant. A. increase; left B. increase; right C. decrease; left D. decrease; right

Q: An increase in the expected inflation rate causes the supply of bonds to ________ and the supply curve to shift to the ________, everything else held constant. A. increase; left B. increase; right C. decrease; left D. decrease; right

Q: When the expected inflation rate increases, the real cost of borrowing ________ and bond supply ________, everything else held constant. A. increases; increases B. increases; decreases C. decreases; increases D. decreases; decreases

Q: In a business cycle expansion, the ________ of bonds increases and the ________ curve shifts to the ________ as business investments are expected to be more profitable. A. supply; supply; right B. supply; supply; left C. demand; demand; right D. demand; demand; left

Q: During a recession, the supply of bonds ________ and the supply curve shifts to the ________, everything else held constant. A. increases; left B. increases; right C. decreases; left D. decreases; right

Q: Factors that decrease the demand for bonds include A. an increase in the volatility of stock prices. B. a decrease in the expected returns on stocks. C. a decrease in the inflation rate. D. a decrease in the riskiness of stocks.

Q: The reduction of brokerage commissions for trading common stocks that occurred in 1975 caused the demand for bonds to ________ and the demand curve to shift to the ________. A. fall; right B. fall, left C. rise; right D. rise; left

Q: Everything else held constant, when bonds become less widely traded, and as a consequence the market becomes less liquid, the demand curve for bonds shifts to the ________ and the interest rate ________. A. right; rises B. right; falls C. left; falls D. left; rises

Q: Everything else held constant, an increase in the liquidity of bonds results in a ________ in demand for bonds and the demand curve shifts to the ________. A. rise; right B. rise; left C. fall; right D. fall; left

Q: Everything else held constant, when stock prices become ________ volatile, the demand curve for bonds shifts to the ________ and the interest rate ________. A. more; right; rises B. more; right; falls C. less; left; falls D. less; left; does not change

Q: Everything else held constant, when stock prices become less volatile, the demand curve for bonds shifts to the ________ and the interest rate ________. A. right; rises B. right; falls C. left; falls D. left; rises

Q: Everything else held constant, an increase in the riskiness of bonds relative to alternative assets causes the demand for bonds to ________ and the demand curve to shift to the ________. A. rise; right B. rise; left C. fall; right D. fall; left

Q: Everything else held constant, an increase in expected inflation, lowers the expected return on ________ compared to ________ assets. A. bonds; financial B. bonds; real C. real estate; financial D. real estate; real

Q: Holding the expected return on bonds constant, an increase in the expected return on common stocks would ________ the demand for bonds, shifting the demand curve to the ________. A. decrease; left B. decrease; right C. increase; left D. increase; right

Q: Holding everything else constant, if interest rates are expected to increase, the demand for bonds ________ and the demand curve shifts ________. A. increases; right B. decreases; right C. increases; left D. decreases; left

Q: Everything else held constant, if interest rates are expected to fall in the future, the demand for long-term bonds today ________ and the demand curve shifts to the ________. A. rises; right B. rises; left C. falls; right D. falls; left

Q: Everything else held constant, when households save less, wealth and the demand for bonds ________ and the bond demand curve shifts ________. A. increase; right B. increase; left C. decrease; right D. decrease; left

Q: During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________, everything else held constant. A. falls; right B. falls; left C. rises; right D. rises; left

Q: When the price of a bond decreases, all else equal, the bond demand curve A. shifts right. B. shifts left. C. does not shift. D. inverts.

Q: A movement along the bond demand or supply curve occurs when ________ changes. A. bond price B. income C. wealth D. expected return

Q: If the interest rate on a bond is below the equilibrium interest rate, there is an excess ________ of bonds and the bond price will ________. A. demand; rise B. demand; fall C. supply; rise D. supply; fall

Q: If the interest rate on a bond is above the equilibrium interest rate, there is an excess ________ for bonds and the bond price will ________. A. demand; rise B. demand; fall C. supply; rise D. supply; fall

Q: If the price of bonds is set ________ the equilibrium price, the quantity of bonds demanded exceeds the quantity of bonds supplied, a condition called excess ________. A. above; demand B. above; supply C. below; demand D. below; supply

Q: A situation in which the quantity of bonds supplied exceeds the quantity of bonds demanded is called a condition of excess supply; because people want to sell ________ bonds than others want to buy, the price of bonds will ________. A. fewer; fall B. fewer; rise C. more; fall D. more; rise

Q: When the interest rate on a bond is ________ the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________. A. above; demand; rise B. above; demand; fall C. below; supply; fall D. above; supply; rise

Q: When the interest rate on a bond is above the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________. A. demand; rise B. demand; fall C. supply; fall D. supply; rise

Q: When the price of a bond is ________ the equilibrium price, there is an excess demand for bonds and price will ________. A. above; rise B. above; fall C. below; fall D. below; rise

Q: When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price will ________. A. demand for; rise B. demand for; fall C. supply of; fall D. supply of; rise

Q: In the bond market, the market equilibrium shows the market-clearing ________ and market-clearing ________. A. price; deposit B. interest rate; deposit C. price; interest rate D. interest rate; premium