1. Which of the following bonds would have the highest default risk?A) municipal bondsB) investment-grade bondsC) U.S. Treasury bondsD) junk bonds2. During a "flight to quality"A) the spread between Treasury bonds and Baa bonds increases.B) the spread between Treasury bonds and Baa bonds decreases.C) the spread between Treasury bonds and Baa bonds is not affected.D) the change in the spread between Treasury bonds and Baa bonds cannot be predicted.3. If 1-year interest rates for the next five years are expected to be 4, 2, 5, 4, and 5 percent,and the 5-year term premium is 1 percent, than the 5-year bond rate will beA) 2 percent.B) 3 percent.C) 4 percent.D) 5 percent.4. Risk premiums on corporate bonds tend to ________ during business cycle expansions and________ during recessions, everything else held constant.A) increase; increaseB) increase; decreaseC) decrease; increaseD) decrease; decrease5. If the expected path of 1-year interest rates over the next four years is 5 percent, 4 percent,2 percent, and 1 percent, then the expectations theory predicts that today's interest rate on thefour-year bond isA) 1 percent.B) 2 percent.C) 3 percent.D) 4 percent.6. An increase in the riskiness of corporate bonds will ________ the yield on corporate bondsand ________ the yield on Treasury securities, everything else held constant.A) increase; increaseB) reduce; reduceC) increase; reduceD) reduce; increase7. When the yield curve is flat or downward-sloping, it suggest that the economy is morelikely to enterA) a recession.B) an expansion.C) a boom time.D) a period of increasing output.8. A ________ yield curve predicts a future increase in inflation.A) steeply upward slopingB) slight upward slopingC) flatD) downward sloping9. The typical shape for a yield curve isA) gently upward sloping.B) mound shaped.C) flat.D) bowl shaped.10. Everything else held constant, the interest rate on municipal bonds rises relative to theinterest rate on Treasury securities whenA) income tax rates are lowered.B) income tax rates are raised.C) municipal bonds become more widely traded.D) corporate bonds become riskier

D) Junk bonds have the highest default risk. They are bonds that have been given a low credit rating, indicating a high risk of default.

A) During a "flight to quality", the spread between Treasury bonds and Baa bonds increases. This is because investors are moving their money to safer investments, which increases the demand for Treasury bonds and decreases the demand for riskier Baa bonds.

D) The 5-year bond rate will be 5 percent. This is calculated by taking the average of the expected 1-year interest rates over the next five years (4, 2, 5, 4, and 5 percent) and adding the 5-year term premium (1 percent).

C) Risk premiums on corporate bonds tend to decrease during business cycle expansions and increase during recessions. This is because the risk of default is lower during expansions and higher during recessions.

C) The expectations theory predicts that today's interest rate on the four-year bond is 3 percent. This is calculated by taking the average of the expected 1-year interest rates over the next four years (5 percent, 4 percent, 2 percent, and 1 percent).

C) An increase in the riskiness of corporate bonds will increase the yield on corporate bonds and reduce the yield on Treasury securities. This is because the increased risk will require a higher return to attract investors, while the decreased demand for riskier corporate bonds will increase the demand for safer Treasury securities, reducing their yield.

A) When the yield curve is flat or downward-sloping, it suggests that the economy is more likely to enter a recession. This is because it indicates that short-term interest rates are expected to be lower in the future, which is often the case during a recession.

A) A steeply upward sloping yield curve predicts a future increase in inflation. This is because it indicates that long-term interest rates are significantly higher than short-term rates, which is often the case when inflation is expected to increase.

A) The typical shape for a yield curve is gently upward sloping. This is because long-term interest rates are usually higher than short-term rates to compensate for the increased risk of holding bonds for a longer period.

A) The interest rate on municipal bonds rises relative to the interest rate on Treasury securities when income tax rates are lowered. This is because the tax-exempt status of municipal bonds becomes less valuable when tax rates are lower, reducing their demand and increasing their yield.