The Risk and Term Structure of Interest Rates

The Risk and Term Structure of Interest Rates
5.1 Multiple Choice
1) The term structure of interest rates is
A) the relationship among interest rates of different bonds with the same maturity.
B) the structure of how interest rates move over time.
C) the relationship among the terms to maturity of different bonds.
D) the relationship among interest rates on bonds with different maturities.
Answer: D
2) 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 terms to maturity of different bonds.
D) the relationship among interest rates on bonds with different maturities.
Answer: B
3) Which of the following long-term bonds should have the lowest interest rate?
A) Corporate Baa bonds
B) U.S. Treasury bonds
C) Corporate Aaa bonds
D) Municipal bonds
Answer: D
4) Which of the following long-term bonds should have the highest interest rate?
A) Corporate Baa bonds
B) U.S. Treasury bonds
C) Corporate Aaa bonds
D) Municipal bonds
Answer: A
5) The risk premium on corporate bonds becomes smaller if
A) the riskiness of corporate bonds increases.
B) the liquidity of corporate bonds increases.
C) the liquidity of corporate bonds decreases.
D) the riskiness of corporate bonds decreases.
E) either (B) or (D) occur.
Answer: E
6) Bonds with relatively low risk of default are called
A) zero coupon bonds.
B) junk bonds.
C) investment grade bonds.
D) none of the above.
Answer: C

7) Bonds with relatively high risk of default are called
A) Brady bonds.
B) junk bonds.
C) zero coupon bonds.
D) investment grade bonds.
Answer: B
8) A corporation suffering big losses might be more likely to suspend interest
payments on its bonds, thereby
A) raising the default risk and causing the demand for its bonds to rise.
B) raising the default risk and causing the demand for its bonds to fall.
C) lowering the default risk and causing the demand for its bonds to rise.
D) lowering the default risk and causing the demand for its bonds to fall.
Answer: B
9) (I) If a corporation suffers big losses, the demand for its bonds will rise because of
the higher interest rates the firm must pay. (II) The spread between the interest rates
on bonds with default risk and default-free bonds is called the risk premium.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Answer: B
10) Holding everything else constant, if a corporation begins to suffer large losses, then
the default risk on
A) corporate bonds will increase, and the expected return on these bonds will
increase.
B) corporate bonds will decrease, and the expected return on these bonds
will increase.
C) corporate bonds will increase, and the expected return on these bonds will
decrease.
D) corporate bonds will decrease, and the expected return on these bonds
will decrease.
Answer: C
11) Holding everything else the same, if a corporation’s earnings rise, then the default
risk on its bonds will
A) increase, and the expected return on these bonds will decrease.
B) decrease, and the expected return on these bonds will decrease.
C) increase, and the expected return on these bonds will increase.
D) decrease, and the expected return on these bonds will increase.
Answer: D

12) If a corporation begins to suffer large losses, then the default risk on
A) corporate bonds will increase, and the equilibrium interest rate on these bonds
will increase.
B) corporate bonds will decrease, and the equilibrium interest rate on these bonds
will increase.
C) corporate bonds will increase, and the equilibrium interest rate on these bonds
will decrease.
D) corporate bonds will decrease, and the equilibrium interest rate on these bonds
will decrease.
Answer: A
13) If a corporation’s earnings rise, then the default risk on its bonds will
A) increase, and the equilibrium interest rate on these bonds will decrease.
B) decrease, and the equilibrium interest rate on these bonds will decrease.
C) increase, and the equilibrium interest rate on these bonds will increase.
D) decrease, and the equilibrium interest rate on these bonds will increase.
Answer: B
14) When the default risk on corporate bonds decreases, other things equal, the demand
curve for corporate bonds shifts to the _____ and the demand curve for Treasury
bonds shifts to the _____
A) right; right.
B) right; left.
C) left; left.
D) left; right.
Answer: B
15) (I) An increase in default risk on corporate bonds shifts the demand curve for
corporate bonds to the right. (II) An increase in default risk on corporate bonds
shifts the demand curve for Treasury bonds to the left.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Answer: D
16) (I) An increase in default risk on corporate bonds shifts the demand curve for
corporate bonds to the left. (II) An increase in default risk on corporate bonds shifts
the demand curve for Treasury bonds to the right.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Answer: C
17) Following the stock market crash of 1987, the spread between interest rates on junk
bonds and U.S. government bonds
A) fell by two percentage points.
B) fell by six percentage points.
C) rose by two percentage points.
D) rose by six percentage points.
Answer: C
18) The stock market crash of October 19, 1987 had a major impact on bond markets.
As investors began to doubt the financial health of corporations,
A) the interest rate on both corporate and U.S. Treasury securities rose, but the
rate on Treasury securities rose by less than the rate on corporate securities,
increasing the interest rate spread between the two.
B) the interest rate on both corporate and U.S. Treasury securities rose, but the
rate on corporate securities rose by less than the rate on Treasury securities,
decreasing the interest rate spread between the two.
C) the interest rate on corporate securities rose and the rate on Treasury securities
declined, increasing the interest rate spread between the two.
D) the interest rate on both corporate and U.S. Treasury securities declined, but
the rate on corporate securities declined by less than the rate on Treasury
securities, decreasing the interest rate spread between the two.
Answer: C
19) When budget talks between congressional Republicans and President Clinton
occurred in late 1995,
A) fear of a government default rose, Treasury bond values fell, and interest rates
on Treasury bonds rose.
B) fear of a government default rose, Treasury bond values fell, and interest rates
on Treasury bonds fell.
C) no one feared a government default, but Treasury bond values fell, and interest
rates on Treasury bonds rose.
D) no one feared a government default, but Treasury bond values fell, and interest
rates on Treasury bonds fell.
Answer: A
20) The spread between interest rates on low quality corporate bonds and U.S.
government bonds
A) widened significantly during the Great Depression.
B) narrowed significantly during the Great Depression.
C) was reversed during the Great Depression.
D) did not change during the Great Depression.
Answer: A

21) Corporate bonds are not as liquid as government bonds because
A) fewer corporate bonds for any one corporation are traded, making them more
costly to sell.
B) the corporate bond rating must be calculated each time they are traded.
C) corporate bonds are not callable.
D) of all of the above.
E) of only (A) and (B) of the above.
Answer: A
22) (I) The risk premium widens as the default risk on corporate bonds increases. (II)
The risk premium widens as corporate bonds become less liquid.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Answer: C
23) When the corporate bond market becomes less liquid, other things equal, the
demand curve for corporate bonds shifts to the _____ and the demand curve for
Treasury bonds shifts to the _____
A) right; right.
B) right; left.
C) left; left.
D) left; right.
Answer: D
24) When the corporate bond market becomes more liquid, other things equal, the
demand curve for corporate bonds shifts to the _____ and the demand curve for
Treasury bonds shifts to the _____
A) right; right.
B) right; left.
C) left; left.
D) left; right.
Answer B
25) (I) If a corporate bond becomes less liquid, the demand for the bond will fall,
causing the interest rate to rise. (II) If a corporate bond becomes less liquid, the
demand for Treasury bonds does not change.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Answer: A
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26) (I) If a corporate bond becomes less liquid, the interest rate on the bond will fall. (II)
If a corporate bond becomes less liquid, the interest rate on Treasury bonds will fall.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Answer: B
27) Which of the following bonds generally has the lowest interest rate?
A) Treasury bonds
B) Corporate Baa bonds
C) Municipal bonds
D) Corporate Aaa bonds
Answer: C
28) If income tax rates were lowered, then
A) the interest rate on municipal bonds would fall.
B) the interest rate on Treasury bonds would rise.
C) the interest rate on municipal bonds would rise.
D) the price of Treasury bonds would fall.
Answer: C
29) If income tax rates rise, then
A) the prices of municipal bonds will fall.
B) the prices of Treasury bonds will rise.
C) the interest rate on Treasury bonds will rise.
D) the interest rate on municipal bonds will rise.
Answer: C
30) An increase in marginal tax rates would likely have the effect of _____ the demand
for municipal bonds and _____ the demand for U.S. government bonds.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing
Answer: B
31) A decrease in marginal tax rates would likely have the effect of _____ the demand
for municipal bonds and _____ the demand for U.S. government bonds.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing
Answer: C
32) Which of the following statements are true?
A) Because coupon payments on municipal bonds are exempt from federal
income tax, the expected after-tax return on them will be higher for individuals
in higher income tax brackets.
B) An increase in tax rates will increase the demand for municipal bonds,
lowering their interest rates.
C) Interest rates on municipal bonds will be lower than on comparable bonds
without the tax exemption.
D) All of the above are true statements.
E) Only (A) and (B) are true statements.
Answer: D
33) Which of the following statements are true?
A) Because coupon payments on municipal bonds are exempt from federal
income tax, the expected after-tax return on them will be higher for individuals
in higher income tax brackets.
B) An increase in tax rates will increase the demand for Treasury bonds, lowering
their interest rates.
C) Interest rates on municipal bonds will be higher than on comparable bonds
without the tax exemption.
D) Only (A) and (B) are true statements.
Answer: A
34) When a municipal bond is given tax-free status, the demand for municipal bonds
shifts ______, causing the interest rate on the bond to _____
A) leftward; rise.
B) leftward; fall.
C) rightward; rise.
D) rightward; fall.
Answer: D
35) When a municipal bond is given tax-free status, the demand for Treasury bonds
shifts _____, and the interest rate on Treasury bonds _____
A) leftward; rises.
B) leftward; falls.
C) rightward; rises.
D) rightward; falls.
Answer: A
36) If municipal bonds were to lose their tax-free status, then the demand for Treasury
bonds would shift _____, and the interest rate on Treasury bonds would _____
A) rightward; fall.
B) rightward; rise.
C) leftward; fall.
D) leftward; rise.
Answer: A
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37) The Bush tax cut passed in 2001 reduces the top income tax bracket from 39 percent
to 35 percent. As a result of this tax cut, the demand for muncipal bonds should shift
to the ______ and the interest rate on municipal bonds should ______.
A) right; decline
B) right; increase
C) left; decline
D) left; increase
Answer: D
38) The relationship among interest rates on bonds with identical default risk, but
different maturities, is called the
A) time-risk structure of interest rates.
B) liquidity structure of interest rates.
C) bond demand curve.
D) yield curve.
Answer: D
39) Yield curves can be classified as
A) upward-sloping.
B) downward-sloping.
C) flat.
D) all of the above.
E) only (A) and (B) of the above.
Answer: D
40) Typically, yield curves are
A) gently upward-sloping.
B) gently downward-sloping.
C) flat.
D) bowl shaped.
E) mound shaped.
Answer: A
41) When yield curves are steeply upward-sloping,
A) long-term interest rates are above short-term interest rates.
B) short-term interest rates are above long-term interest rates.
C) short-term interest rates are about the same as long-term interest rates.
D) medium-term interest rates are above both short-term and long-term
interest rates.
E) medium-term interest rates are below both short-term and long-term interest
rates.
Answer: A
32) Which of the following statements are true?
A) Because coupon payments on municipal bonds are exempt from federal
income tax, the expected after-tax return on them will be higher for individuals
in higher income tax brackets.
B) An increase in tax rates will increase the demand for municipal bonds,
lowering their interest rates.
C) Interest rates on municipal bonds will be lower than on comparable bonds
without the tax exemption.
D) All of the above are true statements.
E) Only (A) and (B) are true statements.
Answer: D
33) Which of the following statements are true?
A) Because coupon payments on municipal bonds are exempt from federal
income tax, the expected after-tax return on them will be higher for individuals
in higher income tax brackets.
B) An increase in tax rates will increase the demand for Treasury bonds, lowering
their interest rates.
C) Interest rates on municipal bonds will be higher than on comparable bonds
without the tax exemption.
D) Only (A) and (B) are true statements.
Answer: A
34) When a municipal bond is given tax-free status, the demand for municipal bonds
shifts ______, causing the interest rate on the bond to _____
A) leftward; rise.
B) leftward; fall.
C) rightward; rise.
D) rightward; fall.
Answer: D
35) When a municipal bond is given tax-free status, the demand for Treasury bonds
shifts _____, and the interest rate on Treasury bonds _____
A) leftward; rises.
B) leftward; falls.
C) rightward; rises.
D) rightward; falls.
Answer: A
36) If municipal bonds were to lose their tax-free status, then the demand for Treasury
bonds would shift _____, and the interest rate on Treasury bonds would _____
A) rightward; fall.
B) rightward; rise.
C) leftward; fall.
D) leftward; rise.
Answer: A
61
37) The Bush tax cut passed in 2001 reduces the top income tax bracket from 39 percent
to 35 percent. As a result of this tax cut, the demand for muncipal bonds should shift
to the ______ and the interest rate on municipal bonds should ______.
A) right; decline
B) right; increase
C) left; decline
D) left; increase
Answer: D
38) The relationship among interest rates on bonds with identical default risk, but
different maturities, is called the
A) time-risk structure of interest rates.
B) liquidity structure of interest rates.
C) bond demand curve.
D) yield curve.
Answer: D
39) Yield curves can be classified as
A) upward-sloping.
B) downward-sloping.
C) flat.
D) all of the above.
E) only (A) and (B) of the above.
Answer: D
40) Typically, yield curves are
A) gently upward-sloping.
B) gently downward-sloping.
C) flat.
D) bowl shaped.
E) mound shaped.
Answer: A
41) When yield curves are steeply upward-sloping,
A) long-term interest rates are above short-term interest rates.
B) short-term interest rates are above long-term interest rates.
C) short-term interest rates are about the same as long-term interest rates.
D) medium-term interest rates are above both short-term and long-term
interest rates.
E) medium-term interest rates are below both short-term and long-term interest
rates.
Answer: A
42) Economists’ attempts to explain the term structure of interest rates
A) illustrate how economists modify theories to improve them when they are
inconsistent with the empirical evidence.
B) illustrate how economists continue to accept theories that fail to explain
observed behavior of interest rate movements.
C) prove that the real world is a special case that tends to get short shrift in
theoretical models.
D) have proved entirely unsatisfactory to date.
Answer: A
43) According to the pure expectations theory of the term structure,
A) the interest rate on long-term bonds will exceed the average of expected future
short-term interest rates.
B) interest rates on bonds of different maturities move together over time.
C) buyers of bonds prefer short-term to long-term bonds.
D) all of the above.
E) only (A) and (B) of the above.
Answer: B
44) According to the pure expectations theory of the term structure,
A) when the yield curve is steeply upward-sloping, short-term interest rates are
expected to rise in the future.
B) when the yield curve is downward-sloping, short-term interest rates are
expected to decline in the future.
C) buyers of bonds prefer short-term to long-term bonds.
D) all of the above.
E) only (A) and (B) of the above.
Answer: E
45) According to the pure expectations theory of the term structure,
A) when the yield curve is steeply upward-sloping, short-term interest rates are
expected to rise in the future.
B) when the yield curve is downward-sloping, short-term interest rates are
expected to remain relatively stable in the future.
C) investors have strong preferences for short-term relative to long-term bonds,
explaining why yield curves typically slope upward.
D) all of the above.
E) only (A) and (B) of the above.
Answer: A
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46) According to the pure expectations theory of the term structure,
A) yield curves should be as equally likely to slope downward as slope upward.
B) when the yield curve is steeply upward-sloping, short-term interest rates are
expected to rise in the future.
C) when the yield curve is downward-sloping, short-term interest rates are
expected to remain relatively stable in the future.
D) all of the above.
E) only (A) and (B) of the above.
Answer: E
47) If the expected path of one-year interest rates over the next four years is 5 percent,
4 percent, 2 percent, and 1 percent, then the pure expectations theory predicts that
today’s interest rate on the four-year bond is
A) 1 percent.
B) 2 percent.
C) 4 percent.
D) none of the above.
Answer: D
48) If the expected path of one-year interest rates over the next five years is 1 percent,
2 percent, 3 percent, 4 percent, and 5 percent, the pure expectations theory predicts
that the bond with the highest interest rate today is the one with a maturity of
A) one year.
B) two years.
C) three years.
D) four years.
E) five years.
Answer: E
49) If the expected path of one-year interest rates over the next five years is 2 percent,
4 percent, 1 percent, 4 percent, and 3 percent, the pure expectations theory predicts
that the bond with the lowest interest rate today is the one with a maturity of
A) one year.
B) two years.
C) three years.
D) four years.
Answer: A
50) According to the market segmentation theory of the term structure,
A) the interest rate for bonds of one maturity is determined by supply and demand
for bonds of that maturity.
B) bonds of one maturity are not substitutes for bonds of other maturities;
therefore, interest rates on bonds of different maturities do not move together
over time.
C) investors’ strong preference for short-term relative to long-term bonds explains
why yield curves typically slope upward.
D) all of the above.
E) none of the above.
Answer: D
51) According to the market segmentation of the term structure,
A) the interest rate for bonds of one maturity is determined by supply and demand
for bonds of that maturity.
B) bonds of one maturity are not substitutes for bonds of other maturities;
therefore, interest rates on bonds of different maturities do not move together
over time.
C) investors’ strong preference for short-term relative to long-term bonds explains
why yield curves typically slope downward.
D) only (A) and (B) of the above.
Answer: D
52) The liquidity premium theory of the term structure
A) indicates that today’s long-term interest rate equals the average of short-term
interest rates that people expect to occur over the life of the long-term bond.
B) assumes that bonds of different maturities are perfect substitutes.
C) suggests that markets for bonds of different maturities are completely separate
because people have preferred habitats.
D) does none of the above.
Answer: D
53) The liquidity premium theory of the term structure
A) assumes investors tend to prefer short-term bonds because they have less
interest rate risk.
B) assumes that interest rates on the long-term bond respond to demand and
supply conditions for that bond.
C) assumes that an average of expected short-term rates is an important
component of interest rates on long-term bonds.
D) assumes all of the above.
E) assumes none of the above.
Answer: D
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54) According to the liquidity premium theory of the term structure,
A) the interest rate on long-term bonds will equal an average of short-term interest
rates that people expect to occur over the life of the long-term bonds plus a
liquidity premium.
B) buyers of bonds may prefer bonds of one maturity over another, yet interest
rates on bonds of different maturities move together over time.
C) even with a positive liquidity premium, if future short-term interest rates are
expected to fall significantly, then the yield curve will be downward-sloping.
D) all of the above.
E) only (A) and (B) of the above.
Answer: D
55) According to the liquidity premium theory of the term structure,
A) because buyers of bonds may prefer bonds of one maturity over another,
interest rates on bonds of different maturities do not move together over time.
B) the interest rate on long-term bonds will equal an average of short-term interest
rates that people expect to occur over the life of the long-term bonds plus a
term premium.
C) because of the positive term premium, the yield curve will not be observed to
be downward-sloping.
D) all of the above.
E) only (A) and (B) of the above.
Answer: B
56) If the yield curve slope is flat, the liquidity premium theory indicates that the market
is predicting
A) a mild rise in short-term interest rates in the near future and a mild decline
further out in the future.
B) constant short-term interest rates in the near future and further out in the future.
C) a mild decline in short-term interest rates in the near future and a continuing
mild decline further out in the future.
D) constant short-term interest rates in the near future and a mild decline further
out in the future.
Answer: C
57) If the yield curve has a mild upward slope, the liquidity premium theory indicates
that the market is predicting
A) a rise in short-term interest rates in the near future and a decline further out in
the future.
B) constant short-term interest rates in the near future and further out in the future.
C) a decline in short-term interest rates in the near future and a rise 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.
Answer: B
58) According to the liquidity premium theory of the term structure, a downwardsloping
yield curve indicates that
A) short-term interest rates are expected to rise in the future.
B) short-term interest rates are expected to remain unchanged in the future.
C) short-term interest rates are expected to decline moderately in the future.
D) short-term interest rates are expected to decline sharply in the future.
Answer: D
59) According to the liquidity premium theory of the term structure, when the yield
curve has its usual slope, the market expects
A) short-term interest rates to stay near their current levels.
B) short-term interest rates to rise sharply.
C) short-term interest rates to drop sharply.
D) none of the above.
Answer: A
60) In actual practice, short-term interest rates are just as likely to fall as to rise; this is
the major shortcoming of the
A) market segmentation theory.
B) pure expectations theory.
C) liquidity premium theory.
D) separable markets theory.
Answer: B
61) Which theory of the term structure proposes that bonds of different maturities are
not substitutes for one another?
A) market segmentation theory.
B) pure expectations theory.
C) liquidity premium theory.
D) separable markets theory.
Answer: A
62) Since yield curves are usually upward sloping, the _____ indicates that, on average,
people tend to prefer holding short-term bonds to long-term bonds.
A) market segmentation theory
B) pure expectations theory
C) liquidity premium theory
D) both (A) and (B) of the above
E) both (A) and (C) of the above
Answer: E
63) _____ cannot explain the empirical fact that interest rates on bonds of different
maturities tend to move together.
A) The market segmentation theory
B) The pure expectations theory
C) The liquidity premium theory
D) both (A) and (B) of the above
E) both (A) and (C) of the above
Answer: A
64) Which of the following theories of the term structure is (are) able to explain the
fact that interest rates on bonds of different maturities tend to move together over
time?
A) The expectations hypothesis
B) The segmented markets theory
C) The preferred habitat theory
D) Both (A) and (B) of the above
E) Both (A) and (C) of the above
Answer: E
65) Of the four theories that explain how interest rates on bonds with different terms to
maturity are related, the one that views long-term interest rates as equaling the
average of future short-term rates expected to occur over the life of the bond is the
A) expectations hypothesis.
B) preferred habitat theory.
C) liquidity premium theory.
D) segmented markets theory.
Answer: A
66) Of the four theories that explain how interest rates on bonds with different terms to
maturity are related, the one that assumes that bonds of different maturities are not
substitutes for one another is the
A) expectations hypothesis.
B) segmented markets theory.
C) liquidity premium theory.
D) preferred habitat theory.
Answer: B
67) The moderately upward-sloping yield curve on March 3, 1997, indicated that
A) short-term rates were expected neither to rise nor fall in the near future.
B) short-term rates were expected to remain relatively unchanged, but that longterm
rates were expected to fall.
C) short-term rates were expected neither to rise nor fall, but that long-term rates
were expected to rise moderately.
D) short-term rates were expected to rise moderately in the near future.
Answer: A
68) The steep upward sloping yield curve on January 2, 2002 indicated that
A) short-term rates were expected neither to rise nor fall in the near future.
B) short-term rates were expected to remain relatively unchanged, but that longterm
rates were expected to fall.
C) short-term rates were expected neither to rise nor fall, but that long-term rates
were expected to rise moderately.
D) short-term rates were expected to rise moderately in the near future.
Answer: D

True/False
1) The term structure of interest rates describes how interest rates move over time.
Answer: FALSE
2) The risk structure of interest rates describes the relationship between the interest
rates of different bonds with the same maturity.
Answer: TRUE
3) The risk premium on corporate bonds becomes smaller as the liquidity of the bonds
falls.
Answer: FALSE
4) An increase in income tax rates will cause the interest rates on tax exempt municipal
bonds to fall relative to the interest rate on taxable corporate securities.
Answer: TRUE
5) The interest rates on bonds of different maturities tend to move together over time.
Answer: TRUE
6) The pure expectations theory is able to explain why yield curves are usually
upward-sloping.
Answer: FALSE
7) A mildly upward sloping yield curve suggests that the market is predicting constant
short-term interest rates.
Answer: TRUE
8) Bonds with the lowest risk of default are often referred to as junk bonds.
Answer: FALSE
9) An increase in the marginal tax rate would likely increase the demand for municipal
bonds, and decrease the demand for U.S. government bonds.
Answer: TRUE
10) When yield curves are downward sloping, long-term interest rates are above shortterm
interest rates.
Answer: FALSE

5.3 Essay
1) Contrast the liquidity premium theory to the market segmentation theory of the term
structure of interest rates.
2) Why would an increase in the income tax rate reduce borrowing costs to
municipalities?
3) Discuss what is shown by a yield curve.
4) Why is it unlikely that the pure expectations theory alone is the correct theory for
explaining the yield curve?
5) What is meant by the risk structure of interest rates?
6) How would a severe recession affect the risk premium on corporate bonds?