MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Default risk is the risk that A) a bond issuer is unable to make interest payments. B) a bond issuer is unable to make a profit. C) a bond issuer is unable to pay the face value at maturity. D) all of the above. E) both A and C above. 2) The spread between the interest rates on default-free bonds and those with a positive default risk is called the A) junk premium. B) capitalized risk. C) default premium. D) risk premium.

3) Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the _____ and the demand curve for Treasury bonds to the _____. A) left; left B) left; right C) right; right D) right; left

4) An increase in the riskiness of corporate bonds will _____ the yield on corporate bonds and _____ the yield on Treasury securities. A) increase; reduce B) reduce; reduce C) increase; not affect D) reduce; increase E) increase; increase 5) Bonds with relatively low risk of default are called A) investment grade bonds. C) zero coupon bonds. 6) Which of the following statements are true? A) A corporate bond's return becomes more uncertain as default risk increases. B) An increase in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. C) As their relative riskiness increases, the expected return on corporate bonds decreases relative to the expected return on default-free bonds. D) The expected return on corporate bonds decreases as default risk increases. E) All of the above are true statements. 7) An increase in the liquidity of corporate bonds will _____ the price of corporate bonds and _____ the yield of Treasury bonds. A) reduce; increase B) increase; reduce C) increase; not affect D) reduce; reduce E) increase; increase B)