the economics of money, banking, and financial markets

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8. 
   

   Which of the following bonds are considered to be default-risk free?
   A) Municipal bonds
   B) Investment-grade bonds
   C) Canadian government bonds
   D) Junk bonds
   Answer: C
   Diff: 1 Type: MC Page Ref: 114
   Skill: Recall
   Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
   rates

   
   


9. 
   

   A bond with default risk will always have a ____ risk premium and an increase in its
   default risk will ____ the risk premium.
   A) positive; raise
   B) positive; lower
   C) negative; raise
   D) negative; lower
   Answer: A
   Diff: 2 Type: MC Page Ref: 114
   Skill: Recall
   Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
   rates

   
   


10. 
    

    If a corporation begins to suffer large losses, then the default risk on the corporate bond will
    ____.
    A) increase and the bond's return will become more uncertain, meaning the expected return on
    the corporate bond will fall
    B) increase and the bond's return will become less uncertain, meaning the expected return on the
    corporate bond will fall
    C) decrease and the bond's return will become less uncertain, meaning the expected return on the
    corporate bond will fall
    D) decrease and the bond's return will become less uncertain, meaning the expected return on the
    corporate bond will rise
    Answer: A
    Diff: 3 Type: MC Page Ref: 114
    Skill: Applied
    Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
    rates