the economics of money, banking, and financial markets

151 $

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4. 
   

   Default risk is the risk that ____.
   A) a bond issuer is unable to make interest payments
   B) a bond issuer is unable to make a profit
   C) a bond issuer is unable to pay the face value at maturity
   D) Both A and C above
   Answer: D
   Diff: 1 Type: MC Page Ref: 113
   Skill: Recall
   Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
   rates

   
   


5. 
   

   Bonds with no default risk are called ____.
   A) flower bonds
   B) no-risk bonds
   C) default-free bonds
   D) zero-risk bonds
   Answer: C
   Diff: 1 Type: MC Page Ref: 113
   Skill: Recall
   Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
   rates

   
   


6. 
   

   The spread between the interest rates on bonds with default risk and default-free bonds is
   called the ____.
   A) risk premium
   B) junk margin
   C) bond margin
   D) default premium
   Answer: A
   Diff: 1 Type: MC Page Ref: 113
   Skill: Recall
   Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
   rates

   
   


7. 
   

   If the probability of a bond default increases because corporations begin to suffer large losses,
   then the default risk on corporate bonds will ____ and the expected return on these bonds
   will ____, everything else held constant.
   A) decrease; increase
   B) decrease; decrease
   C) increase; increase
   D) increase; decrease
   Answer: D
   Diff: 3 Type: MC Page Ref: 113
   Skill: Applied
   Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
   rates