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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
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
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
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