Money Banking and Financial Markets 3Rd Edition Cecchetti Test Bank Full Chapter PDF

Money Banking and Financial Markets
3rd Edition Cecchetti Test Bank

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Chapter 07 - The Risk and Term Structure of Interest Rates
Chapter 07
The Risk and Term Structure of Interest Rates
Multiple Choice Questions
1. The bond rating of a security reflects:

A. The size of the coupon payment relative to the face value
B. The likelihood the lender/borrower will be repaid by the borrower/issuer
C. The return a holder is likely to receive
D. The size of the coupon rate relative to other interest rates
2. The two best known bond rating services are:

A. The Federal Reserve and Moody's Investment Services
B. The Federal Reserve and the U.S. Treasury
C. Standard & Poor's and the Wall Street Journal
D. Standard & Poor's and Moody's Investment Services
3. Investors usually obtain bond ratings from:

A. Private bond-rating agencies
B. The annual tax returns of the issuer
C. The U.S. government from publicly available information
D. Public Information made available by the bond issuers
4. Which of the following assigns widely followed bond ratings?

A. The Federal Reserve
B. The U.S. Treasury
C. The New York Stock Exchange
D. Standard & Poor's

B. The Wall Street Journal
C. Moody's Investor Service
D. The Nasdaq
7-1
6. What is the highest bond rating assigned by Standard and Poor's?

A. AA
B. EEE
C. AAA
D. A
7. The lowest rating for an investment grade bond assigned by Moody's is:
A. Baa
B. A
C. BBB
D. Aa
8. Bonds rated as "highly speculative":

A. Are rated so because they guarantee high returns for the buyer
B. Are commonly referred to as junk bonds
C. Are ranked just below investment grade by Standard & Poor's
D. Are rated so because they do not have any default risk
9. Which of the following would be most likely to earn an AAA rating from Standard &
Poor's?
A. A 30-year bond issued by the U.S. Treasury
B. A bond issue by a new vegetarian fast-food chain
C. A 10-year bond issued by a state or municipality
D. Shares of stock in Coca-Cola
10. Once a bond rating is assigned, it:

A. Never changes over the life of the bond
B. Can change as the financial position of the issuer changes
C. Can only change if the rating change is approved by the Securities and Exchange
Commission
D. Can change on the next bond from the issuer but is fixed for the current bond
7-2
11. Commercial paper refers to:

A. The financial publications read by the CEOs of public corporations
B. Any debt security with a maturity exceeding one year
C. Short-term collateralized securities issued only by corporations
D. Unsecured short-term debt issued by corporations and governments
12. Most commercial paper is:

A. Issued with maturities exceeding one year
B. Issued with maturities between 50 and 75 days
C. Used exclusively for short-term financing needs
D. Issued by foreign companies doing business in the United States
13. If a bond's rating improves it should cause:

A. The bond's price and yield to increase, all other factors constant
B. The bond's price and yield to decrease, all other factors constant
C. The bond's price to increase and its yield to decrease, all other factors constant
D. The bond's price to decrease and its yield to increase, all other factors constant
14. If a bond's rating improves, we would expect:

A. The demand for this bond to increase, all other factors constant
B. The demand for and the yield of this bond to increase, all other factors constant
C. The demand for this bond to decrease, and its yield to increase, all other factors constant
D. Both the demand for and the price of the bond to decrease, all other factors constant
15. Bonds issued by the U.S. Treasury are referred to as benchmark bonds because:
A. They are always purchased for a premium
B. They are the closest thing to a risk-free bond
C. All bonds from national governments are labeled as benchmark bonds
D. All bonds from the U.S. government have the same rate of interest
7-3
16. The risk spread is:

A. The difference between a bond's purchase price and selling price
B. The difference between the bond's yield and the yield on a U.S. Treasury bond of the same
maturity
C. Less than 0 (zero) for a U.S. Treasury bond
D. Assigned by a bond-rating agency
17. The risk spread:

A. Is also known as the default-risk premium
B. Should have a direct relationship with the bond's price
C. Should have an inverse relationship with the bond's yield
D. Is always constant
18. All of the following are true about the risk spread except:
A. It should be higher for highly speculative bonds than investment grade bonds
B. It should have a direct relationship with the bond's yield
C. It should have an inverse relationship with the bond's price
D. It should have a direct relationship with the bond's price
19. The default-risk premium:

A. Is negative for a U.S. Treasury bond
B. Is also known as the risk spread
C. Must always be greater than 0 (zero)
D. Is assigned by a bond-rating agency

A. Should vary directly with the bond's yield and inversely with its price
B. Is less than 0 (zero) for a U.S. Treasury bond
C. Should be lower for a highly speculative bond than for an investment-grade bond
D. Should vary directly with the bond's yield and the bond's price
7-4
21. The risk structure of interest rates says:

A. The interest rates on a variety of bonds will move independently of each other
B. Lower rated bonds will have higher yields
C. U.S. Treasury bond yields always change by more than other bonds
D. Interest rates only compensate for risk in structured amounts
22. U.S. Treasury securities are considered to carry no risk spread because:
A. They are the closest thing to default-risk free that an investor can obtain
B. The prices of U.S. Treasury bonds never change
C. The yields on U.S. Treasury bonds never change
D. The yields on U.S. Treasury bonds are zero
23. The risk structure of interest rates refers to:

A. The relationship among the interest rates of bonds with different maturities
B. The relationship among the interest rates of bonds with the same maturities
C. The relationship among the interest rates of bonds from the same issuer but different
maturities
D. The additional interest required to compensate the buyer for the longer maturity of the
bond
24. A borrower who has to pay an interest rate of 8% rather than 6% due to risk spread will:
A. Pay $20 more in interest annually for every $100 borrowed
B. Pay 33.3% higher interest in dollar terms
C. Pay 2% in net interest
D. Pay less interest in total over the life of the loan
25. Which of the following is true?

A. Long-term bond yields move together but short-term yields do not
B. Short-term bond yields move together but long-term yields do not
C. U.S. Treasury Bill yields are lower than the yields on commercial paper
D. Long-term bond yields are usually the same as short-term yields
7-5
26. Taxes play an important role in bond returns because:

A. All interest from owning bonds is taxed
B. All governments (federal, state, municipal) tax bonds similarly
C. Some bond interest is exempt from some government taxation, so after tax returns across
bonds can vary considerably
D. Only U.S. Treasury bonds are tax-exempt, so investors should always seek higher returns
from other bonds
27. Municipal bonds are issued by:

A. Cities only
B. The U.S. Treasury, but the proceeds can only be used by cities
C. States and cities, but their interest is taxable only at the federal level
D. States and cities and their interest is exempt from U.S. government taxation
28. An investor in a 30% marginal tax bracket, earning $10 in interest annually for a $100
U.S. Treasury bond:
A. Earns a 10% after-tax return because interest on U.S. Treasury bonds is tax exempt at the
federal level
B. Earns a 3% return after-tax
C. Would be indifferent between this bond and a municipal bond offering $7 annually per
$100 of face value, assuming the same default risk
D. Earns a 1% return after-tax
29. The yield on a tax-exempt bond:

A. Equals the taxable bond yield times one minus the tax rate
B. Is equal to the yield on a U.S. 30-year bond
C. Is called the risk-free yield
D. Only applies to foreign bonds because they are exempt from U.S. income taxes
7-6
30. Holding risk constant, an investor earning 6% from a tax-exempt bond who is in a 25%
tax bracket would be indifferent between that bond and:
A. A taxable bond with a 8% yield
B. A taxable bond with a 4.5% yield
C. A taxable bond with a 6.25% yield
D. A taxable bond with a 7.5% yield
A. A taxable bond with a 7.5% yield
C. A taxable bond with a 5% yield
D. A taxable bond with a 6% yield
32. Municipal bonds are usually purchased by:

A. Retired investors who have no other taxable income
B. Investors looking for securities to buy for their IRA accounts
C. Investors who live in cities with high municipal tax rates
D. Investors who are in high marginal tax brackets
33. Suppose the tax rate is 25% and the taxable bond yield is 8%. What is the tax-exempt
bond yield?
A. 2%
B. 2.3%
C. 6%
D. 6.9%
34. In 2003, ratings agencies downgraded bonds issued by the State of California several
times. How will this affect the market for these bonds?
A. Yields on these bonds will decrease and the yield on Treasury bonds will increase
B. The yield on these bonds will not change, nor will the yield on Treasury bonds
C. The yield on these bonds and on Treasury bonds will both decrease
D. Yields on these bonds will increase
7-7
35. Tax-exempt bonds:

A. Generate higher returns for the bondholder when purchased through a tax-exempt
retirement account
B. Are not affected by changes in yields on taxable bonds
C. Are most beneficial to those who pay higher income tax rates
D. Include U.S. Treasury securities because the Internal Revenue Service does not charge
income tax on interest earned from these bonds
36. If a local government eliminates the tax exemption on municipal bonds, we'd expect to
see:
A. An increase in the yield on taxable bonds
B. A decrease in the gap in yields on taxable and tax-exempt bonds
C. A decrease in the yield on municipal bonds
D. Municipal bonds will become more attractive to investors
37. Which of the following is not typically used for qualifying mortgages as prime or
subprime?
A. The borrower's income
B. The borrower's credit score
C. The borrower's race
D. The loan to value ratio
38. According to the Expectations Theory of the term structure, if interest rates are expected
to be 2%, 2%, 4%, and 5% over the next four years, what is the yield on a three-year bond
today?
A. 2.7%
B. 4%
C. 4.3%
D. 8%
7-8
39. Suppose the economy has an inverted yield curve. According to the Expectations
Hypothesis, which of the following interpretations could be used to explain this?
A. Interest rates are expected to fall in the future
B. Investors prefer bonds with more interest-rate risk
C. Investors prefer bonds with less interest-rate risk
D. The term spread is positive
40. Which fact about the term structure is the Expectations Theory unable to explain?
A. Why interest rates on bonds with different terms to maturity tend to move together over
time
B. Why yields on short-term bonds are more volatile than yields on long-term bonds
C. Why longer-term yields tend to be higher than shorter-term yields
D. Why yields on short-term bonds are more volatile than yields on long-term bonds and why
longer-term yields tend to be higher than shorter-term yields
41. Which fact about the term structure is the Expectations Theory able to explain?
A. Why interest rates on bonds with different terms to maturity tend to move together over
time
B. Why yields on short-term bonds are more volatile than yields on long-term bonds
C. Why longer-term yields tend to be higher than shorter-term yields
D. Why interest rates on bonds with different terms to maturity tend to move together over
time and why yields on short-term bonds are more volatile than yields on long-term bonds
42. The risk spread on bonds fluctuates mainly because:

A. Taxes tend to increase over time
B. Bond rating agencies are often inconsistent
C. New information about a borrower's financial condition becomes available
D. People change their attitudes towards risk quickly
43. In the fall of 1998 we saw an increase in the risk spread because:
A. The risk spread always increases as we approach the end of the year
B. The Russian government defaulted on some of its bonds
C. There was an extraordinarily large amount of corporate fraud being reported in 1998
D. There was a significant increase in U.S. income tax rates
7-9
44. A company that continues to have strong profit performance during an economic
downturn when many other companies are suffering losses or failing should:
A. See an increase in the yield of their bonds and the price of the bond increases
B. See their bond rating maintained or actually increase
C. See the demand for their bonds decrease and their yields decrease
D. See the demand and price for their bonds decrease
45. Bonds with the same tax status and ratings:

A. Always have the same yield
B. Can have different yields due to different maturities
C. Should sell for the same price
D. Will still have different yields depending on their face values
46. The U.S. Treasury yield curve:

A. Shows the relationship among bonds with the same risk characteristics but different
maturities
B. Assumes maturities are constant, and reflects the difference in risk
C. Always has a positive slope
D. Always has a negative slope
47. During a recession you would expect the difference between the commercial paper rate
and the yield on U.S. T-bills of the same maturity to:
A. Be the same since their maturities are the same
B. Increase reflecting the possibility of higher default risk for commercial paper
C. Decrease
D. Fluctuate on a daily basis
48. Which of the following statements pertaining to the yield curve is not true?
A. Yield curves usually slope upwards
B. The yield curve shows the difference in default risk between securities
C. The yield curve shows the relationship among bonds with the same risk characteristics but
different maturities
D. The yield curve can be flat or downward sloping depending on market conditions
7-10
49. If the federal government replaced the current income tax with a national sales tax, the
price of:
A. Corporate bonds would rise
B. Municipal bonds would rise
C. Corporate bonds would fall while the price of municipal bonds would rise
D. Municipal bonds would fall while the price of corporate bonds would rise
50. Interest on most bonds issued by states is usually exempt from:

A. State income tax but not federal
B. Federal income tax but not state
C. Both state and federal income taxes
D. City income taxes
51. The term structure of interest rates:

A. Always results in an upward sloping yield curve
B. Represents the variation in yields for securities differing in maturities
C. Usually results in a flat yield curve
D. Usually results in a downward sloping yield curve
52. Which of the following statements in not true of the yield curve for U.S. Treasury
securities?
A. The yield curve usually slopes upward
B. The yield curve usually has a positive slope at first then becomes inverted
C. The yield curve shows the relationship among securities of different maturities
D. The yield curve can shift over time
53. The yield curve for U.S. Treasury securities allows us to draw the following conclusions,
except that:
A. Long-term yields tend to higher than short term yields
B. Interest rates of different maturities tend to move together
C. Long-term rates tend to equal short-term rates
D. Yields on short-term securities are more volatile than yields on long-term bonds
7-11
54. When the yield curve is upward sloping, people are expecting:
A. An economic slowdown
B. The U.S. Treasury may default on its obligations
C. The Federal Reserve is going to ease monetary policy
D. Long-term yields to be higher than short-term yields
55. When the yield curve is downward sloping:

A. People are expecting an economic slowdown
B. Short-term yields are lower than long term yields
C. People are expecting higher inflation in the future
D. People could be expecting a tightening in monetary policy
56. Any theory of the term structure of interest rates needs to explain each of the following,
except:
A. The upward slope of the yield curve
B. Why the yields of different maturities tend to move together
C. Why short-term yields are usually higher than long-term yields
D. Why long-term yields are usually higher than short-term yields
57. The Expectations Hypothesis assumes:

A. A high level of uncertainty regarding the future of long-term yields
B. Investors know the yields on bonds today and form expectations of the yields on short-term
bonds in future time periods
C. Securities of different maturities are not perfect substitutes for each other
D. The risk premium increases with longer maturities
58. The Expectations Hypothesis suggests:

A. The yield curve should usually be downward sloping
B. The yield curve should usually be upward sloping
C. The slope of the yield curve reflects the risk premium associated with longer-term bonds
D. The slope of the yield curve depends on the expectations for future short-term rates
7-12
59. The yield on a 30-year U.S. Treasury security is 6.5%; the yield on a 2-year U.S. Treasury
bond is 4.0%. This data:
A. Indicate the yield curve is downward sloping
B. Indicate the yield curve is flat since the risk premium needs to be added for longer
maturities
C. Indicate the yield curve is upward sloping
D. Indicate that people expect inflation to decrease in the future
60. Assume the Expectation Hypothesis regarding the term structure of interest rates is
correct. Then, if the current one-year interest rate is 4% and the two-year interest rate is 6%,
then investors are expecting:
A. The future one-year rate to be 4%
B. The future one-year rate to be 8%
C. The future one-year rate to be 6%
D. The future one-year rate to be 5%
61. Assume the Expectations Hypothesis regarding the term structure of interest rates is
correct. Then, if the current two-year interest rate is 5% and the current one-year rate is 6%,
then investors expect:
A. The future one-year rate to be 4%
B. The future one-year rate to be 5%
C. The future one-year rate to be 6%
D. The future one-year rate to be 1%
62. Assume the Expectations Hypothesis regarding the term structure of interest rates is
correct. If the current one-year interest rate is 3% and the expected one-year interest rate is
5%, then the current two-year interest rate should be:
A. 3%
B. 5%
C. 4%
D. 8%
7-13
63. Assume an investor has a choice of 3 consecutive one-year bonds or one 3-year bond.
Assuming the Expectations Hypothesis of the term structure of interest rates is correct:
A. The average interest rate of the three consecutive one-year bonds should be less than the 3-
year bond to reflect the risk premium
B. The interest rate of the 3-year bond should equal the average interest rate of the 3 one-year
bonds
C. The three consecutive one-year bonds must have the same interest rate
D. The current one-year interest rate must equal the current 3-year interest rate
64. According to the Expectations Hypothesis:

A. When short-term interest rates are expected to rise in the future, the long-term interest rates
are equal to current short-term interest rates
B. When short-term rates are expected to remain constant in the future, the long-term interest
rates are higher than current short-term interest rates
C. Short-term bonds are perfect substitutes for long-term bonds
D. Expectations of future short-term rates equal estimates of current short-term rates
65. According to the Expectations Hypothesis, if investors believed that, for a given holding
period, the average of the expected future short-term yields was greater than the long-term
yield for the holding period, they would act so as to:
A. Drive down the price of the short-term bond and drive up the price of the long-term bond
B. Drive up the price of the short-term bond and drive down the price of the long-term bond
C. Drive up the prices of both the short- and long-term bonds
D. Drive down the prices of both the short- and long-term bonds
66. The Expectations Hypothesis cannot explain:

A. Why yields on securities of different maturities move together
B. Why short-term yields are more volatile than long term yields
C. Why yield curves usually slope upward
D. Why yield curves usually slope downward
7-14
67. Under the Expectations Hypothesis, a downward-sloping yield curve suggests:

A. Investors expect future short-term interest rates to fall
B. Investors expect future short-term interest rates to rise
C. This is a trick question, the yield curve always slopes upward
D. Investors expect future short-term interest rates to remain constant
68. The Expectations Hypothesis assumes each of the following, except:

A. Long-term bond rates are equal to the average of current and expected future short-term
interest rates
B. Bonds of different maturities are not perfect substitutes
C. Bonds of different maturities have the same risk characteristics
D. Bonds of different maturities are perfect substitutes
69. Suppose that interest rates are expected to remain unchanged over the next few years.
However, there is a risk premium for longer-term bonds. According to the liquidity premium
theory, the yield curve should be:
A. Upward sloping and very steep
B. Upward sloping and relatively flat
C. Inverted
D. Vertical
70. Suppose the economy has an inverted yield curve. According to the Liquidity Premium
Theory, which of the following interpretations could be used to explain this?
A. Interest rates are expected to rise in the future
B. Investors expect an economic slowdown
C. Investors are indifferent between bonds with different time horizons
D. The term spread has increased
71. The economy enters a period of robust economic growth that is expected to last for several
years. How would this be reflected in the risk and term structures of interest rates?
A. An inverted yield curve
B. A decrease in the term spread
C. A decrease in the interest rate spread
D. An increase in yields on tax-exempt bonds
7-15
72. If a one-year bond currently yields 4% and is expected to yield 6% next year, the
Liquidity Premium Theory suggests the yield today on a two-year bond will be:
A. More than 4% but less than 5%
B. 5%
C. 4%
D. More than 5%
73. The addition of the Liquidity Premium Theory to the Expectations Hypothesis allows us
to explain why:
A. Yield curves usually slope upward
B. Interest rates on bonds of different maturities move together
C. Long-term interest rates are less volatile than short term interest rates
D. Yield curves are flat
74. The reason for the increase in inflation risk over time is due to the fact that:
A. The inflation rate always increase over time
B. We always have inflation
C. It is more difficult to forecast inflation over longer periods of time
D. Investors are more focused on nominal returns than real returns
75. The risk premium that investors associate with a bond increases with all of the following
except:
A. Maturity
B. Inflation risk increases
C. Interest-rate risk
D. An improved bond rating
76. Under the Liquidity Premium Theory a flat yield curve implies:
A. There is no risk premium for longer-term maturities
B. Short-term interest rates are expected to remain constant
C. Short-term interest rates are expected to decrease
D. Long-term interest rates are higher than short-term interest rates
7-16
77. Under the Liquidity Premium Theory, if investors expect short-term interest rates to
remain constant, the yield curve should:
A. Have a positive slope
B. Have a negative slope
C. Be flat
D. Have an increasing slope
78. Under the expectations hypothesis, if expectations are for lower inflation in the future than
what it currently is, the yield curve's slope:
A. Will become more upward sloping
B. Will become flat
C. Will be negative
D. Will be vertical
79. As GDP rises the:

A. Risk spread and term spread decrease
B. Risk spread and term spread increase
C. Risk spread increases and the term spread decreases
D. Risk spread decreases and the term spread increases
80. Under the liquidity premium theory, if investors become less certain about future
monetary policy, the yield curve should:
A. Become more upward sloping
B. Become flatter
C. Become inverted
D. Be vertical
81. When the growth rate of the economy slows we would expect:
A. The risk to increase for U.S. Treasury securities
B. The risk spread to increase more between U.S. Treasury Securities and Aaa securities than
between Aaa and Baa securities
C. The risk spread to increase more between Aaa and Baa securities than U.S. Treasuries and
Aaa securities
D. Investors to purchase more junk bonds in search of a higher yield
7-17
82. A flight to quality refers to a move by investors:

A. Away from bonds towards stocks
B. Towards securities of other countries and away from U.S. Treasuries
C. Towards precious metals and away from U.S. Treasury bonds
D. Away from low-quality bonds towards high-quality bonds
83. We would expect the risk spread between Baa bonds and U.S. Treasury securities of the
same maturities to:
A. Widen during periods of economic recession
B. Remain relatively constant over the business cycle
C. Decrease during economic slowdowns
D. Increase during economic growth periods
84. We would expect the relationship between the risk spread on Baa bonds and U.S.
Treasury securities of similar maturities to:
A. Vary directly with economic growth
B. Show no variation over the business cycle
C. Vary inversely with economic growth
D. Breakdown with economic growth
85. A flight to quality should result in:

A. The price of U.S. Treasury Securities rising and the price of corporate bonds rising
B. The yield on U.S. Treasury Securities falling and the price of corporate bonds rising
C. The yield on corporate bonds falling and the price of U.S. Treasury Securities rising
D. The yield on U.S. Treasury securities falling and the price of corporate bonds falling
86. When the Russian government defaulted on its bonds in August 1998:
A. Risk spreads decreased significantly
B. Yields on U.S. Treasury securities fell while yields on corporate bonds rose
C. Yields on U.S. Treasury securities rose while prices of corporate bonds rose
D. Risk spreads increased significantly
7-18
87. An inverted yield curve is a valuable forecasting tool because:

A. The yield curve usually is inverted so it reflects a growing economy
B. The yield curve seldom is inverted and can signal an economic slowdown
C. Investors are expecting higher short-term rates in the future, and this usually signals an
economic slowdown
D. Inverted yield curves signal better economic times are expected
88. The slope of the yield curve seems to predict the performance of the economy:
A. Usually with a 3-month lag
B. Usually with a one-year lag
C. Usually within a few weeks
D. Usually with a two-year lag
89. A proposed increase in the federal income tax rate should:

A. Have no impact on the slope of the yield curve since the tax laws impact all maturities the
same
B. Cause the slope of the yield curve to become negative
C. Increase the slope of the yield curve since it increases the risk premium of longer
maturities
D. Flatten the yield curve
90. How would you expect the mayors of most U.S. cities to respond to a proposed significant
reduction in U.S. income taxes?
A. Favorably, since this will significantly increase the demand for municipal bonds
B. Unfavorably, the demand for municipal bonds will fall and their yields will increase
C. Favorably, the price of municipal bonds should increase and their yields fall
D. No reaction, this should have no impact on municipal bonds at all
91. The terrorist attack on the World Trade Center on September 11, 2001:
A. Triggered a flight to quality in the bond market
B. Caused the demand for U.S. Treasury securities to fall and the demand for corporate bonds
to rise
C. Caused the price of U.S. Treasury securities to fall and the yields on corporate bonds to fall
D. Did not have any significant impact since the risk on all bonds increased
7-19
92. If the Federal Reserve announces an easing of monetary policy and this move was not
expected:
A. It should have no impact on the slope of the yield curve
B. We should expect the yield curve to possibly become inverted
C. The slope of the yield curve would become larger
D. We should expect the yield curve to steepen
93. Increasing tensions in many parts of the world should:

A. Cause the demand for all government securities including U.S. Treasury securities to
decrease
B. Cause the risk spread between U.S. Treasury bonds and other bonds to decrease
C. Cause the price of U.S. Treasury bonds to increase and the yield on other bonds to increase
D. Cause the price of U.S. Treasury bonds to increase and the yield on other bonds to
decrease
94. Increased borrowing by the U.S. Treasury to finance growing budget deficits will:
A. Result in U.S. Treasury yields being higher than high-grade corporate bonds
B. Result in the price of U.S. Treasury bonds rising
C. Cause the yield on U.S. Treasury bonds to increase, but still be lower than corporate bonds
D. Result in lower yields on corporate bonds
95. The presence of a term spread that is usually positive indicates that:
A. The yield curve always slopes upward
B. Bonds of similar risk but with different maturities are not perfect substitutes
C. We should expect the yield curve to usually be flat
D. We should expect the yield curve to usually slope downward
96. The interest-rate risk that is associated with bond investing:

A. Is exists even if an investor plans on holding the bond to maturity
B. Arises because of a mismatch between the investor's investment horizon and the maturity
of the bond
C. Is not reflected in the risk premium
D. Can be eliminated by holding only short-term bonds
7-20
97. Imagine a scandal that finds the officers of bond rating agencies have been taking bribes
to inflate the rating of specific bonds. This should:
A. Have no impact on the bond market since bond markets are highly efficient
B. Decrease the demand for all bonds
C. Increase the demand for U.S. Treasury securities and decrease the demand for corporate
bonds
D. Decrease the risk spread
98. A yield curve that slopes upward says each of the following, except:
A. Short-term rates are expected to decrease
B. People may be expecting short-term rates will be higher in the future
C. Short-term rates could be expected to remain constant
D. Long-term interest rates are higher than current short-term rates
99. Under the Expectations Hypothesis, bonds of different maturities are assumed to be
perfect substitutes because:
A. The risk premium is assumed to be negative
B. Market forces would always have long-term interest rates equal the average of the current
and expected short-term rate
C. Expectations of future interest rates are uncertain and therefore cannot be included in the
analysis
D. Bond markets are very liquid
100. A proposed increase in the federal income tax rates may actually be viewed favorably by
many mayors of cities because:
A. It will allow them to also raise their tax rates
B. It will cause the demand for municipal bonds to increase and their yields to increase
C. People will pay less attention to local taxes
D. It will cause the price of municipal bonds to increase and their yields to decrease
7-21
101. As technology allows information regarding the financial health of corporations to

become easier to obtain, we should expect:
A. The risk spread to decrease
B. The role of bond rating agencies to become more important
C. A decrease in the number of participants in the bond market
D. The risk spread to increase
Short Answer Questions
102. What is the main purpose (function) of bond rating services?
103. What role did rating agencies play in the financial crisis of 2007-2009?
104. What is meant by a subprime mortgage?
7-22
105. If an investor wants to compare commercial paper to a corresponding risk-free

investment, which security would he/she use and why?
106. How did asset backed commercial paper (ABCP) rollover risk contribute to the financial
crisis of 2007-2009?
107. An investor sees the current twelve-month rate at 4% and expects the following future
twelve-month rate for each of the subsequent years; 4.5%, 5.5% and 6.0%. If this investor
views a four-year maturity at 5.65% as equal to four consecutive one-year securities, what is
his/her risk premium?
108. Why do economists pay particular attention to inverted yield curves?
7-23
109. If the yield curve is flat, using liquidity premium theory, what do you know about the
expected future short-term interest rate?
110. What does the risk structure of interest rates predict about the yield on bonds of the same
maturities?
111. Explain why many mayors of cities facing the need to borrow for infrastructure
improvements, may not look favorably on a large federal income tax rate reduction?
112. What is the effective after-tax yield to an investor from a bond paying $70 per $1,000
annually, if the investor is in a 25% marginal tax bracket? Explain.
7-24
113. Consider the following four investors. Rank each according to who has the most to gain
from investing in 30-year tax-exempt municipal bonds. Each investor has $1000 in a savings
account that he/she plans to use to buy bonds. Explain briefly why you ranked the investors
this way.
(a) A 20-year old college student who earns low income through working over summers and
breaks. The student plans to graduate next year.
(b) The CEO of a large company who is currently in the highest tax bracket.
(c) A middle-income household saving up to move into a larger home.
(d) A 60-year old nurse who plans to retire at age 62. He uses a tax-exempt pension fund for
all of his savings.
7-25
114. Using the information provided and the Expectations Hypothesis, compute the yields for
a two-year, three-year, and four-year bonds.

Now, suppose there is a risk premium attached to each bond. These risk premiums are given
in the table below:

Using the information above and the Liquidity Premium Theory, compute the yields for a
two-year, three-year, and four-year bonds. How does this yield curve compare to the one you
computed using the Expectations Hypothesis?
115. What is the equivalent tax-exempt bond yield for a taxable bond with an 8% yield and a
bondholder in a 35% marginal tax rate? Explain.
7-26
116. Assuming the Expectations Hypothesis is correct, and given the following information:
The current four-year interest rate is 5.0%
The current one-year interest rate is 4.0%
The expected one-year rate for one year from now is 5.0%
The expected one-year rate for two years from now is 5.5%
What is the expected one-year rate for three years from now? Explain.
117. Any theory of the yield curve must be able to explain what three general conditions?
118. The usually upward sloping yield curve indicates that long-term bonds have higher
yields than short-term bonds. Why is this?
119. Why can't the Expectations Hypothesis stand alone as an adequate theory to explain
yield curves?
7-27
120. Consider the yield curve below. Using the Expectations Hypothesis, what conclusion can
we draw from the data? Now, using the Liquidity Premium Theory, cite two possible
conclusions we can draw from the data.
121. What impact should an economic slowdown have on the risk structure of interest rates?
7-28
122. During economic slowdowns why would you expect the risk premium to increase the
most between U.S. Treasury bonds and junk bonds?
123. When we compare the graphs of GDP growth over time to the corresponding risk spread
on Baa bonds compared to 10-year U.S. Treasury bonds, what relationship can be inferred?
124. Describe the concept of flight to quality in terms of the Russian government default of
August 1998.
125. Why do yield curves usually slope upward?
7-29
126. Explain why an inverted yield curve is a valuable forecasting tool?
127. If an economy is experiencing rapid economic growth, explain what you would expect to
happen to the yield curve and why?
128. Why might we expect to see a high correlation between increases in the risk structure of
interest rates and the yield curve becoming inverted?
129. Does the Expectations Hypothesis allow for people to have a preference for longer-term
investments? Explain
7-30
130. Explain why most retired individuals are not likely to be heavily invested in municipal
bonds.
131. At the beginning of 2006 the yield curve was usually flat, and sometimes downward
sloping (inverted). This raised concerns that a recession might be on the way. But the slope of
the yield curve is only part of the story. What else is important?
Essay Questions
7-31
132. Please use the graphs to show what happens to the risk (yield) differential in each
situation and why.
Assume the corporate and Treasury bonds have the same maturity; if the corporate bonds are
default-risk free what could you tell about the price and yields of each? Explain.
If the corporate bonds are now viewed as having the possibility of default, what happens in
each market?
If the corporate bonds are granted tax-exempt status, what happens in each market?
If the corporate bonds have a longer maturity than the Treasury bonds what would happen?
133. In 2002 and 2003, the financial markets were hit by many corporate accounting scandals.
Discuss these scandals and the impact they would have not only in terms of a flight to quality,
but also in terms of the faith that people place in bond rating agencies.
7-32
134. Under the Expectations Hypothesis of the term structure of interest rates, explain the
impact of a U.S. Treasury decision to phase out the 30-year bond and to only focus on 3-
month, 1-year, 5-year and 10-year bonds?
135. We have heard the predictions regarding the large number of people that will be retiring
over the next 25-50 years and the strain this is going to place on the federal budget. Assuming
that federal borrowing will have to increase, what is the likely impact going to be on the risk
and term structure (if any) of interest rates and why?
136. The paper-bill spread refers to the interest rate spread between commercial paper and
Treasury bills with the same maturity. Is this a risk spread or a term spread? How do you
expect the paper-bill spread is related to GDP growth? What is the intuition for this result?
What does this imply about the yield curve?
7-33
137. Suppose that the Federal Reserve is concerned about rising inflation, so they increase
short-term interest rates. How will this affect long-term rates and the yield curve? What does
the slope of the yield curve reveal about the effectiveness of the Fed's policy? Explain in the
context of the Liquidity Premium Theory.
7-34
Chapter 07 The Risk and Term Structure of Interest Rates Answer Key
Multiple Choice Questions
1. The bond rating of a security reflects:

A. The size of the coupon payment relative to the face value
B. The likelihood the lender/borrower will be repaid by the borrower/issuer
C. The return a holder is likely to receive
D. The size of the coupon rate relative to other interest rates
AACSB: Analytic
BLOOM'S: Remember
Difficulty: Easy
Topic: Ratings and the Risk Structure of Interest Rates
2. The two best known bond rating services are:

A. The Federal Reserve and Moody's Investment Services
B. The Federal Reserve and the U.S. Treasury
C. Standard & Poor's and the Wall Street Journal
D. Standard & Poor's and Moody's Investment Services
AACSB: Analytic
BLOOM'S: Remember
Difficulty: Easy
7-35
3. Investors usually obtain bond ratings from:

A. Private bond-rating agencies
B. The annual tax returns of the issuer
C. The U.S. government from publicly available information
D. Public Information made available by the bond issuers
AACSB: Analytic
BLOOM'S: Remember
Difficulty: Medium

B. The U.S. Treasury
C. The New York Stock Exchange
D. Standard & Poor's
AACSB: Analytic
BLOOM'S: Remember
Difficulty: Medium

B. The Wall Street Journal
C. Moody's Investor Service
D. The Nasdaq
AACSB: Analytic
BLOOM'S: Remember
Difficulty: Medium
7-36
6. What is the highest bond rating assigned by Standard and Poor's?

A. AA
B. EEE
C. AAA
D. A
AACSB: Analytic
BLOOM'S: Remember
Difficulty: Easy
7. The lowest rating for an investment grade bond assigned by Moody's is:
A. Baa
B. A
C. BBB
D. Aa
AACSB: Analytic
BLOOM'S: Remember
Difficulty: Easy
8. Bonds rated as "highly speculative":

A. Are rated so because they guarantee high returns for the buyer
B. Are commonly referred to as junk bonds
C. Are ranked just below investment grade by Standard & Poor's
D. Are rated so because they do not have any default risk
AACSB: Analytic
BLOOM'S: Remember
Difficulty: Medium
7-37
9. Which of the following would be most likely to earn an AAA rating from Standard &
Poor's?
A. A 30-year bond issued by the U.S. Treasury
B. A bond issue by a new vegetarian fast-food chain
C. A 10-year bond issued by a state or municipality
D. Shares of stock in Coca-Cola
AACSB: Reflective Thinking

BLOOM'S: Understand
Difficulty: Medium
10. Once a bond rating is assigned, it:

A. Never changes over the life of the bond
B. Can change as the financial position of the issuer changes
C. Can only change if the rating change is approved by the Securities and Exchange
Commission
D. Can change on the next bond from the issuer but is fixed for the current bond

BLOOM'S: Understand
Difficulty: Medium
11. Commercial paper refers to:

A. The financial publications read by the CEOs of public corporations
B. Any debt security with a maturity exceeding one year
C. Short-term collateralized securities issued only by corporations
D. Unsecured short-term debt issued by corporations and governments
AACSB: Analytic
BLOOM'S: Understand
Difficulty: Easy
7-38
12. Most commercial paper is:

A. Issued with maturities exceeding one year
B. Issued with maturities between 50 and 75 days
C. Used exclusively for short-term financing needs
D. Issued by foreign companies doing business in the United States

BLOOM'S: Understand
Difficulty: Easy
13. If a bond's rating improves it should cause:

A. The bond's price and yield to increase, all other factors constant
B. The bond's price and yield to decrease, all other factors constant
C. The bond's price to increase and its yield to decrease, all other factors constant
D. The bond's price to decrease and its yield to increase, all other factors constant

BLOOM'S: Analyze
Difficulty: Medium
14. If a bond's rating improves, we would expect:

A. The demand for this bond to increase, all other factors constant
B. The demand for and the yield of this bond to increase, all other factors constant
C. The demand for this bond to decrease, and its yield to increase, all other factors constant
D. Both the demand for and the price of the bond to decrease, all other factors constant

BLOOM'S: Apply
Difficulty: Medium
7-39
15. Bonds issued by the U.S. Treasury are referred to as benchmark bonds because:
A. They are always purchased for a premium
B. They are the closest thing to a risk-free bond
C. All bonds from national governments are labeled as benchmark bonds
D. All bonds from the U.S. government have the same rate of interest

BLOOM'S: Understand
Difficulty: Medium
16. The risk spread is:

A. The difference between a bond's purchase price and selling price
B. The difference between the bond's yield and the yield on a U.S. Treasury bond of the same
maturity
C. Less than 0 (zero) for a U.S. Treasury bond
D. Assigned by a bond-rating agency
AACSB: Analytic
BLOOM'S: Understand
Difficulty: Easy
17. The risk spread:

A. Is also known as the default-risk premium
B. Should have a direct relationship with the bond's price
C. Should have an inverse relationship with the bond's yield
D. Is always constant
AACSB: Analytic
BLOOM'S: Understand
Difficulty: Medium
7-40
18. All of the following are true about the risk spread except:
A. It should be higher for highly speculative bonds than investment grade bonds
B. It should have a direct relationship with the bond's yield
C. It should have an inverse relationship with the bond's price
D. It should have a direct relationship with the bond's price

BLOOM'S: Apply
Difficulty: Medium

A. Is negative for a U.S. Treasury bond
B. Is also known as the risk spread
C. Must always be greater than 0 (zero)
D. Is assigned by a bond-rating agency
AACSB: Analytic
BLOOM'S: Remember
Difficulty: Medium

A. Should vary directly with the bond's yield and inversely with its price
B. Is less than 0 (zero) for a U.S. Treasury bond
C. Should be lower for a highly speculative bond than for an investment-grade bond
D. Should vary directly with the bond's yield and the bond's price

BLOOM'S: Understand
Difficulty: Medium
7-41
21. The risk structure of interest rates says:

A. The interest rates on a variety of bonds will move independently of each other
B. Lower rated bonds will have higher yields
C. U.S. Treasury bond yields always change by more than other bonds
D. Interest rates only compensate for risk in structured amounts

BLOOM'S: Understand
Difficulty: Medium
22. U.S. Treasury securities are considered to carry no risk spread because:
A. They are the closest thing to default-risk free that an investor can obtain
B. The prices of U.S. Treasury bonds never change
C. The yields on U.S. Treasury bonds never change
D. The yields on U.S. Treasury bonds are zero

BLOOM'S: Understand
Difficulty: Easy
23. The risk structure of interest rates refers to:

A. The relationship among the interest rates of bonds with different maturities
B. The relationship among the interest rates of bonds with the same maturities
C. The relationship among the interest rates of bonds from the same issuer but different
maturities
D. The additional interest required to compensate the buyer for the longer maturity of the
bond

BLOOM'S: Understand
Difficulty: Medium
7-42
24. A borrower who has to pay an interest rate of 8% rather than 6% due to risk spread will:
A. Pay $20 more in interest annually for every $100 borrowed
B. Pay 33.3% higher interest in dollar terms
C. Pay 2% in net interest
D. Pay less interest in total over the life of the loan

BLOOM'S: Analyze
Difficulty: Hard
25. Which of the following is true?

A. Long-term bond yields move together but short-term yields do not
B. Short-term bond yields move together but long-term yields do not
C. U.S. Treasury Bill yields are lower than the yields on commercial paper
D. Long-term bond yields are usually the same as short-term yields

BLOOM'S: Understand
Difficulty: Medium
26. Taxes play an important role in bond returns because:

A. All interest from owning bonds is taxed
B. All governments (federal, state, municipal) tax bonds similarly
C. Some bond interest is exempt from some government taxation, so after tax returns across
bonds can vary considerably
D. Only U.S. Treasury bonds are tax-exempt, so investors should always seek higher returns
from other bonds

BLOOM'S: Understand
Difficulty: Medium
Topic: Differences in Tax Status and Municipal Bonds
7-43
27. Municipal bonds are issued by:

A. Cities only
B. The U.S. Treasury, but the proceeds can only be used by cities
C. States and cities, but their interest is taxable only at the federal level
D. States and cities and their interest is exempt from U.S. government taxation
AACSB: Analytic
BLOOM'S: Remember
Difficulty: Easy
28. An investor in a 30% marginal tax bracket, earning $10 in interest annually for a $100
U.S. Treasury bond:
A. Earns a 10% after-tax return because interest on U.S. Treasury bonds is tax exempt at the
federal level
B. Earns a 3% return after-tax
C. Would be indifferent between this bond and a municipal bond offering $7 annually per
$100 of face value, assuming the same default risk
D. Earns a 1% return after-tax
AACSB: Analytic
BLOOM'S: Analyze
Difficulty: Hard
29. The yield on a tax-exempt bond:

A. Equals the taxable bond yield times one minus the tax rate
B. Is equal to the yield on a U.S. 30-year bond
C. Is called the risk-free yield
D. Only applies to foreign bonds because they are exempt from U.S. income taxes
AACSB: Analytic
BLOOM'S: Understand
Difficulty: Medium
7-44
A. A taxable bond with a 8% yield
C. A taxable bond with a 6.25% yield
D. A taxable bond with a 7.5% yield
AACSB: Analytic
BLOOM'S: Apply
Difficulty: Hard
A. A taxable bond with a 7.5% yield
C. A taxable bond with a 5% yield
D. A taxable bond with a 6% yield
AACSB: Analytic
BLOOM'S: Apply
Difficulty: Hard
32. Municipal bonds are usually purchased by:

A. Retired investors who have no other taxable income
B. Investors looking for securities to buy for their IRA accounts
C. Investors who live in cities with high municipal tax rates
D. Investors who are in high marginal tax brackets

BLOOM'S: Understand
Difficulty: Medium
7-45
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Money should never be carried; one’s servant should keep it, save
a few kerans.
In very cold weather it is as well to put on a big pair of coarse
country socks over one’s boots, and to twist a bit of sheepskin, with
the hair on, round the stirrup iron; these precautions keep the feet
warm.
A sun hat or topi is of the first necessity; also thick and strong
loose-fitting gloves (old ones are best) of buckskin.
A change of trousers or breeches, in case of a soaking, should be
kept with the head servant, who should always have matches.
Bryant and May’s are the best, and with three of their matches a
cigar or pipe can be lit in any wind: they sell a tin outer match-box
which is very useful, as one cannot crush the box; this, with one’s
knife, pipe and pocket-handkerchief, should be one’s only personal
load.
Oxford shirts, grey merino socks, and a cardigan of dark colour,
complete the equipment; the last is a sine quâ non.
A Norfolk jacket is best for outer garment. No tight-fitting thing is of
any use.
On arrival tea should be the first thing, the kettle being got under
way at once; then carpets spread, chairs and table brought,
mattresses filled and laid, beds made, and fire lit if cold. Make tea
yourself in your kettle, and make it strong; never let your servants
make it, as they either steal the tea or put it in before the water is
boiling, so that they may get a good cup, and you, of course, get
wash.
A Persian lantern should be taken of tin and linen (this shuts up)
for visiting the stable at night, and another for the cook to use.
Water should always be carried both to quench thirst, and for a
small supply lest at the next stage water be bad or salt.
Smoked goggles are a necessity.
A puggree of white muslin should be used for day marching.
A big brass cup can be taken in a leather case on the head
servant’s saddle-bow; it acts as cup or basin.
No English lamps should be used, as they always get out of order.
It is wise before starting to see that the cook’s copper utensils are
all tinned inside. A copper sponge-bath and wash-basin are needed.
Plates and dishes all of tinned copper.
A few nails are required to nail up curtains, stop holes, etc.
APPENDIX D.
RUSSIAN GOODS VERSUS ENGLISH.
The Karūn River Route—The best means of reaching the Commercial

Centres of Persia—Opinions of Experts—Wishes Of Merchants.
Colonel Bateman Champain, R.E., in a paper read before the

Royal Geographical Society, January 15, 1883, after estimating the
population of Persia at six millions, gives among the products of the
country, “grains of all kinds, cotton, tobacco, silk, opium, fruits, dates,
wool, hides, carpets, rugs, and an immense variety of the luxuries
and necessaries of life. There is, on the other hand, a large demand
for cloth, cotton fabrics, sugar, tea, coffee, and all the innumerable
comforts called for by a moderately civilised community.” He then
goes on to state, “that the great proportion of these articles are
imported from or through Russia” and that “it is but too evident that
Russian manufactures are steadily superseding British wares at
Ispahan, and even in the Persian markets south of that centre.”
Colonel Champain then proceeds to notice the various proposed
means for reaching the commercial centres of Persia; and after
pointing out their disadvantages, draws the attention of the Society
to the proposed route viâ the Karūn River.
General Sir F. Goldsmid, after corroborating the statements of
Colonel Champain as to the roads, spoke of railways in the future
through Persia, particularly a complete railway between England and
India; said that “failing the project of the great Indian railway, which
could not be carried out for many years, nothing could be better than
the proposed communication, partly by water and partly by road, viâ
Ahwaz to Ispahan and Teheran” (the Karūn River route).
Mr. G. S. Mackenzie, after some prefatory remarks, recounted how
he started from Mohammera (to which place goods may be taken by
ocean steamers), on the 27th July, 1878, in the steamer Karūn of
120 tons, built for Hadji Jabar Khan, Governor of Mohammera, at a
cost of 6000l.; in twenty-three hours Mr. Mackenzie arrived at
Ahwaz, without the steamer either bumping or grounding, and he
ascertained that at the lowest season the river is navigable. At
Ahwaz the river is blocked by rapids for about 1100 yards as the
crow flies, but (a canal or) a tramway of some 1600 yards would
reach the open portion of the river; thence Captain Selby, in the
Indian steamer Assyria, succeeded in ascending to within five miles
of Shuster (and also he steamed up the Diz River to within one mile
of Dizful). From Shuster to Ispahan is 266 miles, or twelve ordinary
mule stages.
The time taken by goods in reaching Ispahan from Mohammera by
river is,
Days. hrs.
By steamer to Ahwaz 0 23
By transshipment by (train or) mules 0 4
Thence to Shuster by river, say fifty miles 0 12
By caravan to Ispahan (allowing one day’s detention) 13 0
14 15
The present route is from Bushire to Ispahan (while from
a week’s to a fortnight’s delay at Shiraz is generally 23 0
experienced in getting fresh mules)
Certain difference 8 9
Or probably (on account of delay at Shiraz) 18 0
The land journey (the chief of the Bakhtiaris being favourable, of

which there is no doubt) resolves itself to a journey over an ordinary
Persian mule track, no worse than the old one from Bushire to
Shiraz, while as it passes through a good grazing country, hire would
be cheaper.
After some remarks in praise of Russia from Col. C. E. Stewart,
Mr. Russell Shaw, having a general experience of railways, and
having actually surveyed a proposed line from Baghdad to the
Persian frontier, disposed of the various costly and ideal schemes of
railways for Persia; and suggested the feasibility of reaching Persia
from India.
The President, after a few general remarks, in which he wished
well to large schemes of railway extension through Persia, in the far
distant future, “thought it had been clearly demonstrated that it
was possible, at a very small cost, to get a route into that
part of Persia where alone Englishmen could hope
successfully to compete with Russians.”
The President stated that, “It was clear that if she (Persia) would
offer no obstacles, the route up the Karūn would very soon be made
practicable; and he could not but think that if it were steadily pressed
upon the Persian Government, the desired result would be
obtained.”
He concluded with well-deserved compliments to Colonels
Champain and Smith, and Mr. Mackenzie.
It is a question whether the valuable commercial interests of this
country in Persia receive the attention they deserve. Why do we not
try to imitate Russia in opening the marts of Persia? She has done
so till the word “Russian” has come to mean “anything foreign”! Why
do not we insist on the Karūn River being thrown open to British
enterprise? Russia is a civilising influence, a rough one, perhaps, but
still a civilising influence: and she is civilising the Turkoman.
The export of opium alone in 1881 was 924,000 lbs., which at 16s.
a lb.—an ordinary price—is 739,200l.; and were Persia thrown open
to English enterprise, this sum would have been sent there, not in
specie, but in Manchester manufactured goods, etc.
I have good authority for stating that England is the only country
admitting the produce of Persia duty free; as opium, wool, cotton
(and good cotton), carpets, grain, dates, galls, gums.
Persia gives nothing in the way of facilities in return, for Russian
influence is too strong, and under that influence, or from her own
tortuous policy, she keeps the southern route, viâ the Karūn River,
closed to English enterprise.
But the principal difficulty that the English merchant has to contend
against, is the difficulty he has as an Englishman to recover debts,
and whether this be impotence or policy on the part of those in
authority, the fact remains, and has necessitated the withdrawal of
important English establishments from Ispahan and Shiraz. The tact
or energy of Her Majesty’s representatives at Teheran and Bushire is
not to be doubted; but Downing Street seems to order a “masterly
inactivity” or “an expectant attitude.” At Teheran we have a Minister
Plenipotentiary and a Vice Consul, with the usual staff of a Legation;
at Tabriz and Bushire, Consuls-General: but at Kermanshah,
Hamadan, Ispahan, Shiraz, Yezd, and Kerman, all great commercial
centres, we have only native agents; these men exercise no
influence, and are held in contempt by natives and Europeans alike,
as powerless. At times, however, the native (or British) agent has
real influence, mostly personal: as in the case of Mirza Hassan Ali
Khan, C.I.E., our late agent at Shiraz. We want English Consuls to
protect us and our trade, say the merchants, and then the opening of
the Karūn River: without these Persia as a mart is closed to English
enterprise, and becomes the monopoly of Russia.
GLOSSARY OF PERSIAN WORDS,
Having the transliteration of the Oriental scholar Johnson affixed in
parentheses to most words. Where no parentheses occur, the same
way of writing the word as that scholar is employed.
Abba, Abbah (abā).—A long, sleeveless, square-cut cloak,

generally of camel-hair—much worn by priests.
Ab-i-Rūkhni (ābi rukni).—The Spring of Rukhni (Rooknabad,
Moore).
Ab Khori (āb khūrī).—A watering bit.
Achōn (ākhūn).—A schoolmaster.
Agha, Aga (āghā).—A lord, a master.
Ahū (āhū).—An antelope.
Aid-i-no rūz (aidi naw roz).—New Year’s Day.
Alangū.—A bangle (of glass).
Aleph, Alef (alaf).—A grain, grass, or forage-seller.
Alhamdulillah (al hamdu li’llāh).—Thank God. Praise to
God.
Alkalūk, Alkalōok (alkhálik).—An inner quilted tunic.
Alū Balū (ālū bālū).—A cherry.
Alū Bokhara (ālū Bokhara).—A kind of small acid plum.
Amān, Amaun (amān).—Mercy!
Anderūn (andarūn).—The harem. Women’s quarters.
Asp-i-no-zin (aspi naw zīn).—A horse just fit for the saddle.
Badinjon (bādinjān).—The aubergine or brinjal.
Badragha (badraka).—A riding out with a departing guest.
Baggali (baghalī).—Native glass bottles.
Bakkal (bakkāl).—A general dealer.
Bamiah.—The ladies’-finger (a vegetable).
Bala khana (bālā khāna).—An upper room, hence balcony.
Bander (banda).—Literally, a slave. I (by courtesy used).
Bazaar (bāzār).—A collection of shops (the road between
which is usually covered).
Bazaar kabob (bāzār kabāb).—Minced and seasoned meat
toasted.
Bāzārcha buland.—The lofty bazaar.
Bazū-band (bāzū-band).—An armlet (generally containing a
talisman).
Bazzaz.—A shopkeeper.
Belli (balē).—Yes.
Bero (bi-ro).—Go! (Imperative).
Berūni (birūni).—The outer (or men’s) apartments.
Bezun (bi-zan).—Beat! (Imperative).
Bhuta (bota).—Camel-thorn, brushwood.
Bismillah (bismi’llāh).—In the name of God!
Borio (būrīy).—A kind of coarse matting.
Brilliān (biryān).—Minced and spiced meat sold cooked in
the bazaar.
Bulbul (pronounced Bull Bull).—A nightingale.
Būrak.—A small meat pie.
Butcha, Batcha (bacha).—Child! (Mode of addressing
servants, equivalent to the Anglo-Indian, boy!)
Cafsh-dooz. See Kafsh-dooz.
Cah (See Kah).—Cut straw.
Cajaweh. See Kajaweh.
Calaat. See Kalaat.
Calam-i-Rumi. See Kalam-i-Rumi.
Canaāt. See Kanaat.
Canjar. See Kanjar.
Caravanserai. See Karavanserai.
Chadūr (chādar).—An outer woman’s veil.
Chai (chā).—Tea (used throughout Russia and the East).
Chargāt (chargāt).—A square headkerchief.
Chehel sitoon (chihal-sitūn).—“The Forty Columns.”
Chekmeh-dooz (Chakmah dūz).—A boot-maker.
Chenar (chanār).—A plane-tree.
Cherragh (charāgh).—A lamp (in form and principle that of
the early classic one).
Chick (chīgh).—A fly blind.
Chillaw (chulāw).—Plain boiled rice.
Chocolah (chaghāla).—Green fruit when very small.
Chuppao (chāpū).—A raid on horseback.
Chupper (chār pā).—A mounted post (a quadruped), posting.
Chupperkhana (chār pā khāna).—A posting-house.
Colah. See Kolah.
Coorjin. See Koorjīn.
Coorshid. See Kūrshid.
Cossib. See Kossib.
Danah (dahanah).—A curb-ring bit.
Dar (dār).—A gallows, the execution pole.
Delak (dallāk).—A barber, a bath attendant.
Delleh.—A kind of weasel (? Mustela sarmatica).
Deyeereh (dayyīrah).—A tambourine.
Dilgoosha (dil-ku-shāy).—“Heartsease,” name of a garden at
Shiraz.
Dolma (dūlmah).—A kind of sweet or flavoured pudding of
rice or meat.
Doogh (dogh).—Buttermilk, curds and water.
Dozd (duzd).—A thief.
Dozd gah (duzd-gāh).—A place of thieves.
Dubbeh (dabbah).—A repented and repudiated bargain.
Dyah (dāya).—A wet nurse.
Fal (fāl).—A lot, an omen (sortes), pronounced fahl.
Farnoose (fānūs).—A cylindrical lantern.
Farrash, Ferash (farāsh).—A carpet-spreader.
Farrash (ferash)-Bashi.—Lit. chief carpet-spreader.
Farsakh.—A distance of from three and a half to four miles,
the hour’s march of a loaded mule, the parasang of
Xenophon.
Farsh.—A carpet of any kind.
Fellak, Fellek (fallak).—A pole having a noose attached to
hold the feet for the application of “the sticks” (or
bastinado).
Feramoosh-khana (farāmush khana).—The (lit.) house of
forgetfulness, a masonic lodge.
Fizinjan (fizinjān).—A dish flavoured with condensed
pomegranate juice and pounded walnuts.
Furder Insh’allah (fardā Insh’allāh).—“Please God to-
morrow.”
Gelas (gelās).—A white-heart cherry.
Gelim (gilīm).—A common kind of carpet.
Germak (garmak).—A small early melon.
Gezanjabine (gazangubīn).—Manna, or nougat.
Gheva (gewa).—A summer shoe described at p. 190.
Gholam (ghulām).—A mounted servant, lit. a slave, an
irregular cavalry-man.
Goja (gaujah).—A small green plum.
Gōmpezah (gōmbeza).—A dome.
Goor Khur (gor khar).—The wild ass.
Gūl (gul).—A flower.
Gūl Anar (guli nār).—Pomegranate flower.
Gūl-i-Soorkh (guli surkh).—The moss rose from which the
attār is made.
Gūmrūk (gumruk).—A custom-house.
Gūmrūkji (gumruk-chi).—A custom-house officer, or farmer
of customs.
Gunge (ganj).—A treasure.
Gungifeh (ganjīfa).—Playing cards.
Hakim (hakīm).—A physician.
Hakim-bashi (hakīm bashi).—The chief physician.
Hammal (hammāl).—A porter.
Hammam (hammām).—A bath similar to the Turkish bath.
Harrh (harr).—Rabid.
Hassin or Hasseen (hasīn).—A pan.
Hassir (hasīr).—A kind of fine matting.
Hauz (hawz).—A tank generally of stone and raised above
the ground-level.
Henna (hinnā).—A vegetable dye used on hair, hands, and
feet.
Hindiwana (hinduwānah).—A water-melon.
Hissam u Sultaneh (Husām us Sultana).—The Sharp Sword
of the State (a title that was given to the late uncle of the
Shah).
Hoojrah (hajrah).—An office, or bureau.
Huc (hak).—A share, the dervishes’ cry.
Hukhm (hukm).—An order.
Imād-u-Dowlet (Imad ud Dawla).—A title, viz. the Pillar of
the State.
Imam (imām).—A saint.
Iran (Īrān).—Persia.
Istikhbal (istikbāl).—A riding out to meet an arriving guest or
personage.
Istikhara (istiharat).—Omens (taking), chances.
Itizad-u-Sultaneh (Itizād us Saltanah).—A title, viz. the
Support of the State.
Jai-sheer (jayshīr).—Wild celery.
Jejim (jājim).—A thin kind of travelling carpet.
Jika (jīgha).—A jewel worn on the head by women. The royal
hat ornament of feathers and diamonds.
Jūl (jall).—A portion of horse-clothing.
Jūniver (jānwār).—A wild animal, an animal.
Kabab or Kabob (kabāb).—A roast or toasted meat.
Kaffir (kāfir).—An infidel (a term of reproach).
Kafsh.—A shoe.
Kafsh-dooz (kafsh-doz).—A shoe- or slipper-maker.
Kafteh-bazi (kaftār).—Pigeon-flying.
Kah (kāh).—Cut straw.
Kah gil (kāh gil).—Clay and straw mixed for plastering.
Kahtam (khātam).—Inlaid work like Tonbridge ware.
Kajaweh (kajāwa).—A covered horse pannier.
Kalaat (khalat).—A robe (or other token) of honour.
Kalam-dan (kalamdān).—A pen-case.
Kalam-i-Rumi (kallami-Rumi).—Lit. Turkish cabbage.
Kali (kālī).—A carpet having a pile.
Kalian, Kallian, Calian (kalyūn, kalyān).—A water-pipe or
hubble-bubble.
Kallehpuz (kallapaz).—Sheep’s head- and trotter-boiler.
Kanaat, Kanat, Canaāt (kanāt).—An underground channel
for irrigating.
Kanara (kanāra).—A side carpet.
Kanjar (khanjar).—A curved dagger.
Karavanserai (karavān-serai).—A public rest-house for
caravans; a khan.
Karbīza (kharbuza).—A melon.
Karkool (kakūl).—A long lock of hair by which Mahommed is
supposed to draw the believer up into paradise.
Kashang.—A beau, lit. beautiful.
Kawam.—A prefect.
Keeal (kayal).—A cucumber.
Keesa, Keeseh (kisa).—A hair glove used in the bath.
Keisi (kayzi ?).—Dried apricots.
Kemmerbund (kamar-band).—A belt, or sash.
Kendil (kindīl).—A votive offering of peculiar shape, generally
of copper or other metal.
Kenneh (? kannah).—A camel- or sheep-tick.
Ketkhoda (kat-khudā).—The head-man of a parish or village.
Khan (Khān).—A conferred title, which descends to all
children—now very common: in the second generation
equal to Esquire.
Khānum (khānam).—A lady.
Khok ber ser um (khāk bar sar-am).—Ashes on my head.
Kholar (? kolar).—A kind of wine of Shiraz.
Khyat (khayyāt).—A tailor.
Kohl.—Black antimony, eye paint.
Kolah (kulah).—A hat.
Kolajah (kulījah).—An outer coat for men or women.
Koompezeh, Kumbiza (kumbīza).—A species of cucumber.
Koorisht (khūrish).—A savoury dish, a ragout.
Koorjin, Coorjin (khwur-chīn).—Saddle-bags.
Kosh guzeran (khwush guzārān).—A free liver.
Kossib, Cossib (kasb).—A craftsman.
Kotol.—An effigy.
Kotul (kutal).—A mountain pass, lit. a ladder.
Kummer, Kammer (kammah).—A straight hiltless sword or
dirk, with a broad blade.
Kūmrah (khumra).—A wine (or other) jar.
Kūrbāghah.—A frog.
Kūrshid (khūrshīd).—The sun with rays of light.
Kūrsi (kūrsī).—A small platform used to cover a fire-pot, a
chair.
Kuttl-i-aum (katli ām).—A general massacre.
Lahaf (lihāf).—A quilted coverlid.
Lallah (lālā).—A male nurse.
Lanjin, Lanjeen.—An earthen pan.
Latifeh (latīfeh ?).—A courtezan, a Persian court card.
Lodah, Lodeh (lawda).—A pannier for grapes.
Lūti (lūtī).—A buffoon, a scamp, a thief.
Machrore (makrūh).—Lit. detestable, but yet not illicit; things
not to be eaten, but yet not unclean; i. e. not an unlawful
thing, but one which had better be avoided.
Maidān (maydān, mīdān).—The public square. A distance
about a furlong.
Makhmūn shud um (makhmūn shudam).—I am deceived.
Mallagh (?).—A tumbler pigeon, a summersault.
Mambar (mimbar).—A pulpit.
Mangal (munkul).—A brazier.
Mash’allah (Māshā’llah).—Lit. What God pleases! A phrase
used when praising, to avoid evil eye.
Mast (māst).—Curdled milk (Turkish, yaourt).
Maund (man).—A Persian weight of nearly seven, or nearly
fourteen pounds.
Meana (miyāna).—The middle. The middle tube of the water-
pipe.
Mehdresseh (medresseh; Arabic, madrasat).—A college.
Mejlis (majlas).—An assembly, a reception.
Mil, Meel (mayl).—A column, a watch-tower.
Mir-achor (mīr-ākhur).—Master of the horse, the.
Mir-shikar (mīr-shikār).—Chief huntsman, the.
Mirza (mīrzā).—One who can write, a clerk, a secretary, a
gentleman. As an affix equals “Prince.”
Moaalim (mwallīm).—A schoolmaster.
Modakel (mudākhil).—Illicit percentage, “cabbage.”
Mohulla (mahallah).—A street, a parish.
Monajem (munajjam).—An astrologer.
Mor (muhr).—A seal, a piece, as at draughts, etc.
Mūlla, Moollah (mūllā).—A priest.
Mūnshi, Moonshee (munshī).—A secretary, a clerk.
Murshed (murshid).—A chief of dervishes, or of a sect or
guild.
Mūschir (mushīr al mulk).[38]—The principal revenue officer
of Fars.
Mūshtahed (Mujtahid).—A teacher of law.
Must (mast).—Lit. drunk. The state of excitement of the
camel, etc.
Mutlub (matlab).—The pith, or meaning (of a letter).
Naib (naīb).—A deputy, a post-house keeper.
Naksh.—A kind of embroidery. See p. 131.
Nammad (namad).—A felt (of various kinds).
Nammak (namak).—Beauty of a brunette, high colour.
Narghil (nārjīl).—A cocoa-nut, a kind of water-pipe.
Nawalla (?).—Balls of flour given to horses and camels.
Nazir (nāzir).—A steward.
Neh (nay).—A reed, a spear, a flute.
Neh-peech (nay-pīch).—The flexible tube of a water-pipe.
Nejis (najīs).—Unclean.
Nober (nawba).—First-fruits.
Noker (nawkar).—A servant.
Nuffus (nafs).—Breath.
Ootoo (atw).—An iron.
Ootoo kesh (atw-kash).—An ironer.
Orūssēe (ūrūsī).—Lit. Russian, i. e. foreign. A Russian (-
shaped), i. e. foreign shoe, a raisable window, a room
having a raisable window, etc.
Paleng (palank).—A panther.
Pallikee (pālkī?).—A mule pannier to ride in.
Pane (pa-in).—Dried horse-dung.
Peilewan, Pehliwan (pahlevān).—A wrestler.
Peish-kesh (pīsh-kash).—An offering to obtain favour (a
nominal present).
Peish Khidmut (pīsh khidmat).—A head table-servant.
Peish-waz (pīsh-wāz).—Lit. a going out to meet.
Perhān, Perahān (pīrahan).—A shirt (for man, woman, or
horse).
Pider-sag (pidar sag).—Son of a dog! (Lit. O dog-fathered
one!)
Pillaw, Pilaw (palāw).—Rice boiled with butter.
Pūlad (pūlād).—Art steel-work. Damascened iron.
Rammal (rammāl).—A conjuring mountebank and finder of
treasure, a diviner. See p. 120.
Rangraz (rang-rez).—A dyer.
Rassianah (rāziyānah).—Anise plant, the.
Reich-i-Baba (rīsh-i-Baba).—A grape called “Old man’s
beard.”
Reis-i-Seem (rais).—Lit. master of the wire, i. e. Telegraph
superintendent.
Resht-i-Behesht (Risht-i-Bihisht ?).—Glory or brightness of
heaven.
Rivend (rīwand).—Rhubarb.
Roseh Khana (rosah-khānah).—A prayer-meeting, etc.
Rubanda (rū-band).—A (face) veil.
Rushwah (rishwat).—Lit. manure, i. e. a bribe.
Ryot (ra-īyat).—A subject, a tiller of the earth, a villager.
Sag.—A dog, a cur, a term of abuse.
Sahib (sāhib).—Lit. owner; Sir, Mr. (to an European).
Sāle ab (sayl ab).—Rise of the waters.
Sandalli (sandalī).—A chair.
Sang.—Lit. a stone, i. e. a weight.
Sangak.—A kind of bread. See p. 334.
Santoor, Santūr (santīr or santūr).—Harmonicon.
Sarhang.—A colonel.
Segah (sīgha).—A concubine.
Ser-andaz (sar-andāz).—That (carpet) laid over the head (of
the room).
Ser-Kashik-ji-bashi (sar-kashīkchi bāshī).—Chief of the
guard.
Seroff (sarrāf).—A banker, a money-changer.
Shah (Shāh).—The King.
Shahzadeh (Shāh-zāda).—Lit. born of a King, i. e. Prince (or
descendant of a Prince or King).
Shargird-chupper (shāgird-chāpār).—A posting guide.
Shatir (shātir).—A running footman.
Shatrunj (shatrang).—Chess.
Shatur.—A wrinkle.
Sheera (shīra).—Condensed grape sugar.
Shemr (Shimar).—The slayer of the martyr Houssein.
Sherbet (sharbat).—Syrup—generally fruit syrup—syrup and
water.
Sherbet-dar (sharbat-dār).—A servant who makes ices, etc.
Shikari (shikārī).—A huntsman.
Shireh-Khana (? shīra-khāna).—A wine-factory.
Shitūr (shatūr).—A wrinkle (of a carpet, etc.).
Shub-kolah (shab-kulah).—A night-hat (or cap).
Shukker para (shakar-pāra).—A kind of very sweet apricot
(lit. a lump of sugar).
Shul-berf (shal [?] bāf).—Loosely woven.
Shulwar (shalwār).—Trousers, breeches, petticoats.
Shuma (shumā).—You.
Soorki, Sorki (sākī).—(Classical) a cupbearer.
Sufrah.—A sheet of stuff or leather spread on ground to dine
off.
Sungak. See Sangak.
Syud, Seyd (sayyid).—A descendant of Mahommed.
Tager (tājir).—A merchant.
Takhja (tākchah).—A recess in the wall a yard from the
ground, a niche.
Takht.—A throne, a bedstead, a sofa, a platform.
Takht-i-Nadir (takhti-Nadir).—Backgammon. (Nādir Shah’s
favourite game.)
Takht-i-Pul.—A kind of backgammon.
Takht-rowan (takhti-ravanda).—Lit. a flowing or running bed,
i. e. a horse-litter.
Talár (tālār).—A lofty verandah, an arched room open at one
end.
Tamasha (tamāsha).—A show, a sight, a spectacle.
Tannoor, Tannūr, Tandoor (tannūr).—An oven.
Tarr (tār).—A guitar-like banjo.
Tatar (Turkish).—A gholam, a post rider, a courier.
Tazzia (Ta-ziyah).—The religious dramas or miracle plays.
Tazzie (tāzi).—A greyhound.
Teleet (? talīt).—A mixture of grass and cut straw for horse
feed.
Telism (tilism).—A talisman.
Teriak (tiryak).—Opium.
Teriakdan (tiryak-dan).—An opium pill-box.
Teriakmali (tiryak-māli).—Rubbing (i. e. preparation of)
opium.
Terkesh-dooz (tarkash-doz).—A quiver-maker, a saddler.
Toman, Tomaun (tomān).—Ten kerans (7s. 6d.), a gold coin.
Toolah (tūla).—A sporting dog.
Toorbesah, Toorbiza (turbuza).—A radish.
Tootoon (tūtan).—Tobacco for the chibouque.
Tūmbak (tumbak).—A kind of drum.

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Money Banking and Financial Markets

3rd Edition Cecchetti Test Bank

Multiple Choice Questions

1. The bond rating of a security reflects:

2. The two best known bond rating services are:

3. Investors usually obtain bond ratings from:

4. Which of the following assigns widely followed bond ratings?

5. Which of the following assigns widely followed bond ratings?

6. What is the highest bond rating assigned by Standard and Poor's?

8. Bonds rated as "highly speculative":

10. Once a bond rating is assigned, it:

11. Commercial paper refers to:

12. Most commercial paper is:

13. If a bond's rating improves it should cause:

14. If a bond's rating improves, we would expect:

16. The risk spread is:

17. The risk spread:

19. The default-risk premium:

20. The default-risk premium:

21. The risk structure of interest rates says:

23. The risk structure of interest rates refers to:

25. Which of the following is true?

26. Taxes play an important role in bond returns because:

27. Municipal bonds are issued by:

29. The yield on a tax-exempt bond:

32. Municipal bonds are usually purchased by:

35. Tax-exempt bonds:

42. The risk spread on bonds fluctuates mainly because:

45. Bonds with the same tax status and ratings:

46. The U.S. Treasury yield curve:

50. Interest on most bonds issued by states is usually exempt from:

51. The term structure of interest rates:

55. When the yield curve is downward sloping:

57. The Expectations Hypothesis assumes:

58. The Expectations Hypothesis suggests:

64. According to the Expectations Hypothesis:

66. The Expectations Hypothesis cannot explain:

67. Under the Expectations Hypothesis, a downward-sloping yield curve suggests:

68. The Expectations Hypothesis assumes each of the following, except:

79. As GDP rises the:

82. A flight to quality refers to a move by investors:

85. A flight to quality should result in:

87. An inverted yield curve is a valuable forecasting tool because:

89. A proposed increase in the federal income tax rate should:

93. Increasing tensions in many parts of the world should:

96. The interest-rate risk that is associated with bond investing:

101. As technology allows information regarding the financial health of corporations to

Short Answer Questions

102. What is the main purpose (function) of bond rating services?

104. What is meant by a subprime mortgage?

105. If an investor wants to compare commercial paper to a corresponding risk-free

108. Why do economists pay particular attention to inverted yield curves?

a two-year, three-year, and four-year bonds.

in the table below:

conclusions we can draw from the data.

125. Why do yield curves usually slope upward?

126. Explain why an inverted yield curve is a valuable forecasting tool?

Multiple Choice Questions

1. The bond rating of a security reflects:

2. The two best known bond rating services are:

3. Investors usually obtain bond ratings from:

4. Which of the following assigns widely followed bond ratings?

5. Which of the following assigns widely followed bond ratings?