the economics of money, banking, and financial markets

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17. 
    

    Which of the following statements is true?
    A) A decrease in default risk on corporate bonds lowers the demand for these bonds, but
    increases the demand for default-free bonds.
    B) The expected return on corporate bonds decreases as default risk increases.
    C) A corporate bond's return becomes less uncertain as default risk increases.
    D) As their relative riskiness increases, the expected return on corporate bonds increases relative
    to the expected return on default-free bonds.
    Answer: B
    Diff: 2 Type: MC Page Ref: 114
    Skill: Applied
    Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
    rates

    
    


18. 
    

    The spread between interest rates on low quality corporate bonds and Canada bonds
    ____.
    A) widens significantly during recessions
    B) narrows significantly during recessions
    C) narrows moderately during recessions
    D) does not change during recessions
    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

    
    


19. 
    

    As their relative riskiness ____, the expected return on corporate bonds ____
    relative to the expected return on default-free bonds, everything else held constant.
    A) increases; increases
    B) increases; decreases
    C) decreases; decreases
    D) decreases; does not change
    Answer: B
    Diff: 1 Type: MC Page Ref: 115
    Skill: Applied
    Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
    rates