the economics of money, banking, and financial markets

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20. 
    

    Everything else held constant, if the federal government were to guarantee today that it will
    pay creditors if a corporation goes bankrupt in the future, the interest rate on corporate bonds
    will ____ and the interest rate on government securities will ____.
    A) increase; increase
    B) increase; decrease
    C) decrease; increase
    D) decrease; decrease
    Answer: C
    Diff: 2 Type: MC Page Ref: 115
    Skill: Applied
    Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
    rates

    
    


21. 
    

    Bonds with relatively high risk of default are called ____.
    A) Brady bonds
    B) junk bonds
    C) zero coupon bonds
    D) investment grade bonds
    Answer: B
    Diff: 1 Type: MC Page Ref: 115
    Skill: Recall
    Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
    rates

    
    


22. 
    

    Bonds with relatively low risk of default are called ____ securities and have a rating of
    Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and
    are called ____.
    A) investment grade; lower grade
    B) investment grade; junk bonds
    C) high quality; lower grade
    D) high quality; junk bonds
    Answer: B
    Diff: 2 Type: MC Page Ref: 115
    Skill: Recall
    Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
    rates

    
    


23. 
    

    Which of the following bonds would have the highest default risk?
    A) Provincial bonds
    B) Investment-grade bonds
    C) Canada bonds
    D) Junk bonds
    Answer: D
    Diff: 1 Type: MC Page Ref: 115
    Skill: Recall
    Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
    rates