1) Which of the following bonds are considered to be default-risk free?

A) municipal bonds B) investment-grade bonds

C) AAA rated bonds D) junk bonds

E) None of the above are considered default-risk free.

5) The collapse of the mortgage market and the failure of so many financial institutions in the 1980s increased the spread

between Baa and default-free U.S. Treasury bonds. This is due to

A) a reduction in risk. B) a reduction in maturity. C) a flight to quality. D) a flight to liquidity.

8) Historically, which of the following long-term bonds normally has the lowest yield to maturity?

A) Corporate Baa bonds B) U.S. Treasury bonds C) Corporate Aaa bonds D) Municipal bonds

11) According to the pure expectations theory of the term structure, a flat 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.

14) According to the preferred habitat theory of the term structure, a flat 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.

15) If the expected path of 1-year interest rates over the next four years is 4.5%, 5.25%, 5.75%, and 6.0%, the preferred

habitat 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. E) unable to be determined with the information given.

18) When the actual yield curve is steeply upward-sloping, it suggest that the economy is likely close to _______

A) the trough of a recession. B) the peak of an expansion.

C) the middle of a business cycle. D) full employment.