Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Money, Banking, and International Finance

Key Terms

default risk
default-risk-free instruments
default risk premium
bond rating
municipal bonds
term structure of interest rates

yield curve

segmented markets theory

expectations theory

preferred habitat theory

term premium

Chapter Questions

1. If one bond market has a high risk while the other is low risk, then how does risk impact the
   bond markets? Please use demand and supply analysis to answer this question.


2. If one bond market were highly liquid while the other market has low liquidity,
   subsequently, how would liquidity impact the bond markets? Please use demand and supply
   analysis to answer this question.


3. If one market has high information costs while the other does not, then how would
   information cost affect the bond markets? Please use demand and supply analysis to answer
   this question.


4. If a government taxes one bond market but not another, subsequently, how would taxes
   affect the bond markets? Please use demand and supply analysis to answer this question.


5. Explain both the term structure of interest rates and the yield curve.


6. Which three theories explain the characteristics of the yield curve? Which theory is
   plausible?


7. If you saw a yield curve with a negative slope, which economic phenomenon would you
   predict to occur in a year?