Interest rate spread

Suppose that a 5-year Treasury bond pays an annual rate of return of 1.3%, and a 5-year bond of the fictional company Risky Investment Inc. pays an annual rate of return of 7.1%. The risk premium on the Risky Investment bond is __________ percentage points.

Consider a decrease in the annual rate of return on the Risky Investment bond from 7.1 percent to 5.5 percent. Such a change would _________ the interest rate spread on the Risky Investment bond over Treasuries to ___________ .

Which of the following explains the decrease in the annual rate of return on the Risky Investment bond?

1. The expected default rate on the Risky Investment bond has decreased.

2. The expected default rate on the Treasury bond has increased.

3. The expected default rate on the Treasury bond has decreased.

4. The expected default rate on the Risky Investment bond has increased.

Question

Part 1: Refer to Figure 14.3. At an interest rate of 10%, there is:

A) excess demand for money of $500.

B) excess supply of money $300

C) excess supply of money of $300.

D) excess demand for money of $500

Part 2: Refer to Figure 14.3. At an interest rate of 4%, there is:

A) an excess demand for money of $200.

B) excess supply of money of $200

C) an excess demand for money of $600.

D) excess supply of money of $200

Part 3:Refer to Figure 14.3. The money market will be in equilibrium at an interest rate of:

A) 8%.

B) 3%.

C) 6%.

D) 0%.

% MS 10 Interest rate, r ma 1,000 500 800 Money, M Figure 14.3 Search

MS 10 Interest rate, r 500 800 1.000 Money, M Figure 14.3 38) Refer to Figure 14.3. At an interest rate of 10%, there is 38 A) an excess supply of money of $500. C) an excess demand for money of $300. BJ an excess supply of money of $300. DI an excess demand for money of $500. 8 Interest rate, r 4 600 800 1,200 Money, M Figure 14.4 39) Refer to Figure 14.4. If the Fed wants to reduce the economy's market interest rate from 6 percent 39) to 4 percent, it needs to A) buy government bonds. B) sell government bonds. keep A constant. DJ increase M 40) The decrease In Investment caused by an increase in government borrowing is called 40 Al monetizing the debt. B) crowding out. C) Ricardian equivalence. DJ the reshuffle effect