21) Corporate bonds are not as liquid as government bonds because

A) fewer 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) all of the above.

E) 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) 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

28) 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

29) 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

30) 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

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31) 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

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 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

33) 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

34) 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

35) 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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36) The Bush tax cut passed in 2001 reduces the top income tax bracket from 39 percent to 35 percent over the next ten years. As a result of this tax cut, the demand for municipal 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

37) 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) yield curve.

D) bond demand curve. Answer: C

38) 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

39) Typically, yield curves are A) gently upward-sloping. B) gently downward-sloping. C) flat.

D) bowl shaped. E) mound shaped. Answer: A

40) 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

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