Question 1

An upward-sloping yield curve

Accepted Answer

A)   may be an indication that interest rates are expected to increase.
B)   may incorporate a liquidity premium.
C)   may reflect the confounding of the liquidity premium with interest rate expectations.
D)   All of the options are correct.
E)   None of the options are correct.F) All of the above
G) C) and E)

Question 2

Which of the following are possible explanations for the term structure of interest rates?

Accepted Answer

A)   The expectations theory
B)   The liquidity preference theory
C)   Modern portfolio theory
D)   The expectations theory and the liquidity preference theoryE) All of the above
F) None of the above

Question 3

An upward sloping yield curve is a(n)  _______ yield curve.

Accepted Answer

A)   normal
B)   humped
C)   inverted
D)   flat
E)   None of the options are correct.F) D) and E)
G) B) and E)

Question 4

The yield curve

Accepted Answer

A)   is a graphical depiction of term structure of interest rates.
B)   is usually depicted for U.S. Treasuries in order to hold risk constant across maturities and yields.
C)   is usually depicted for corporate bonds of different ratings.
D)   is a graphical depiction of term structure of interest rates and is usually depicted for U.S. Treasuries in order to hold risk constant across maturities and yields.
E)   is a graphical depiction of term structure of interest rates and is usually depicted for corporate bonds of different ratings.F) A) and C)
G) None of the above

Question 5

If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows) ,

Accepted Answer

A)   arbitrage would probably occur.
B)   arbitrage would probably not occur.
C)   the FED would adjust interest rates.
D)   None of the options are correct.E) All of the above
F) A) and B)

Question 6

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000.   Maturity  Price  (Years)  1$943.402881.683808.884742.05\begin{array} { c c } 	ext { Maturity } & 	ext { Price } \	ext { (Years)  } & \1 & \$ 943.40 \2 & 881.68 \3 & 808.88 \4 & 742.05\end{array} Maturity  (Years)  1234​ Price $943.40881.68808.88742.05​  According to the expectations theory, what is the expected forward rate in the third year?

Accepted Answer

A)   7.00%
B)   7.33%
C)   9.00%
D)   11.19%
E)   None of the options are correct. F) None of the above
G) A) and E)

Question 7

The yield curve is a component of

Accepted Answer

A)   the Dow Jones Industrial Average.
B)   the consumer price index.
C)   the index of leading economic indicators.
D)   the producer price index.
E)   the inflation index.F) B) and C)
G) A) and D)

Question 8

The "break-even" interest rate for year n that equates the return on an n-period zero-coupon bond to that of an n - 1 - period zero-coupon bond rolled over into a one-year bond in year n is defined as

Accepted Answer

A)   the forward rate.
B)   the short rate.
C)   the yield to maturity.
D)   the discount rate.
E)   None of the options are correct.F) B) and E)
G) A) and D)

Question 9

The graphic representation of the term structure of interest rates is the _______________.

Accepted Answer

A)   forward rate
B)   volatility index
C)   yield curve
D)   expectations table
E)   None of the options are correct.F) C) and D)
G) All of the above

Question 10

What theory believes short-term investors dominate the market so that the forward rate will generally exceed the expected short rate?

Accepted Answer

A)   Liquidity preference theory
B)   Expectations theory
C)   Market segmentation theory
D)   Forward rate theory
E)   Short rate theoryF) A) and B)
G) C) and E)

Question 11

Suppose that all investors expect that interest rates for the 4 years will be as follows:   Year  Forward Interest Rate 0 (today)  3%14%25%36%\begin{array}{lc}	ext { Year } & 	ext { Forward  Interest Rate } \0 & 	ext { (today)  } 3\% \1 & 4\% \2 & 5\% \3 & 6\%\end{array} Year 0123​ Forward Interest Rate  (today)  3%4%5%6%​ 
 What is the price of a 2-year maturity bond with a 5% coupon rate paid annually? (Par value = $1,000.)

Accepted Answer

A)   $1,092.97
B)   $1,054.24
C)   $1,028.50
D)   $1,073.34
E)   None of the options are correct. F) B) and C)
G) C) and D)

Question 12

Suppose that all investors expect that interest rates for the 4 years will be as follows:   Year  Forward Interest Rate 0 (today)  3%14%25%36%\begin{array}{lc}	ext { Year } & 	ext { Forward  Interest Rate } \0 & 	ext { (today)  } 3\% \1 & 4\% \2 & 5\% \3 & 6\%\end{array} Year 0123​ Forward Interest Rate  (today)  3%4%5%6%​ 
 What is the yield to maturity of a 3-year zero-coupon bond?

Accepted Answer

A)   7.00%
B)   9.00%
C)   6.99%
D)   4.00%
E)   None of the options are correct. F) A) and D)
G) B) and E)

Question 13

Year  1-Year Forward Rate 14.6%24.9%35.2%45.5%56.8%\begin{array}{cc}	ext { Year } & 	ext { 1-Year Forward Rate } \1 & 4.6\% \2 &4.9\% \3 & 5.2\% \4 & 5.5\% \5 &6.8\%\end{array} Year 12345​ 1-Year Forward Rate 4.6%4.9%5.2%5.5%6.8%​ 
 What should the purchase price of a 4-year zero-coupon bond be if it is purchased today and has face value of $1,000?

Accepted Answer

A)   $887.42
B)   $821.15
C)   $879.54
D)   $856.02
E)   $866.32 F) A) and E)
G) B) and E)

Question 14

The ___________ yield curve is created from stripped treasuries.

Accepted Answer

A)   basic
B)   forward
C)   inverted
D)   pure
E)   None of the options are correct.F) C) and E)
G) D) and E)

Question 15

Which of the following combinations will result in a sharply-increasing yield curve?

Accepted Answer

A)   Increasing future expected short rates and increasing liquidity premiums
B)   Decreasing future expected short rates and increasing liquidity premiums
C)   Increasing future expected short rates and decreasing liquidity premiums
D)   Increasing future expected short rates and constant liquidity premiums
E)   Constant future expected short rates and increasing liquidity premiumsF) A) and B)
G) A) and C)

Question 16

Investors can use publicly available financial data to determine which of the following?I)  The shape of the yield curveII)  Expected future short-term rates (if liquidity premiums are ignored) III)  The direction the Dow indexes are headingIV)  The actions to be taken by the Federal Reserve

Accepted Answer

A)   I and II
B)   I and III
C)   I, II, and III
D)   I, III, and IV
E)   I, II, III, and IVF) A) and C)
G) C) and D)

Question 17

Year  1-Year Forward Rate 14.6%24.9%35.2%45.5%56.8%\begin{array}{cc}	ext { Year } & 	ext { 1-Year Forward Rate } \1 & 4.6\% \2 &4.9\% \3 & 5.2\% \4 & 5.5\% \5 &6.8\%\end{array} Year 12345​ 1-Year Forward Rate 4.6%4.9%5.2%5.5%6.8%​ 
 What should the purchase price of a 2-year zero-coupon bond be if it is purchased today and has face value of $1,000?

Accepted Answer

A)   $966.87
B)   $911.37
C)   $950.21
D)   $956.02
E)   $945.51 F) C) and D)
G) All of the above

Question 18

Treasury STRIPS are

Accepted Answer

A)   securities issued by the Treasury with very long maturities.
B)   extremely risky securities.
C)   created by selling each coupon or principal payment from a whole Treasury bond as a separate cash flow.
D)   created by pooling mortgage payments made to the Treasury.E) A) and B)
F) None of the above

Question 19

Year  1-Year Forward Rate 14.6%24.9%35.2%45.5%56.8%\begin{array}{cc}	ext { Year } & 	ext { 1-Year Forward Rate } \1 & 4.6\% \2 &4.9\% \3 & 5.2\% \4 & 5.5\% \5 &6.8\%\end{array} Year 12345​ 1-Year Forward Rate 4.6%4.9%5.2%5.5%6.8%​ 
 What should the purchase price of a 3-year zero-coupon bond be if it is purchased today and has face value of $1,000?

Accepted Answer

A)   $887.42
B)   $871.12
C)   $879.54
D)   $856.02
E)   $866.32 F) D) and E)
G) C) and D)

Question 20

The yield curve shows at any point in time

Accepted Answer

A)   the relationship between the yield on a bond and the duration of the bond.
B)   the relationship between the coupon rate on a bond and time to maturity of the bond.
C)   the relationship between yield on a bond and the time to maturity on the bond.
D)   All of the options are correct.
E)   None of the options are correct.F) C) and D)
G) D) and E)

Exam 15: The Term Structure of Interest Rates

If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows) ,

Correct Answer
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$\begin{array}{cc}\text { Year } & \text { 1-Year Forward Rate } \\1 & 4.6\% \\2 &4.9\% \\3 & 5.2\% \\4 & 5.5\% \\5 &6.8\%\end{array}$ What should the purchase price of a 2-year zero-coupon bond be if it is purchased today and has face value of $1,000?

Correct Answer
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The graphic representation of the term structure of interest rates is the _______________.

Correct Answer
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Treasury STRIPS are

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The yield curve

Correct Answer
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Which of the following are possible explanations for the term structure of interest rates?

Correct Answer
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The yield curve shows at any point in time

Correct Answer
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Correct Answer
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$\begin{array}{cc}\text { Year } & \text { 1-Year Forward Rate } \\1 & 4.6\% \\2 &4.9\% \\3 & 5.2\% \\4 & 5.5\% \\5 &6.8\%\end{array}$ What should the purchase price of a 3-year zero-coupon bond be if it is purchased today and has face value of $1,000?

Correct Answer
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What theory believes short-term investors dominate the market so that the forward rate will generally exceed the expected short rate?

Correct Answer
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The yield curve is a component of

Correct Answer
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The "break-even" interest rate for year n that equates the return on an n-period zero-coupon bond to that of an n - 1 - period zero-coupon bond rolled over into a one-year bond in year n is defined as

Correct Answer
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Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lc}\text { Year } & \text { Forward Interest Rate } \\0 & \text { (today) } 3\% \\1 & 4\% \\2 & 5\% \\3 & 6\%\end{array}$ What is the yield to maturity of a 3-year zero-coupon bond?

Correct Answer
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Investors can use publicly available financial data to determine which of the following?I) The shape of the yield curveII) Expected future short-term rates (if liquidity premiums are ignored) III) The direction the Dow indexes are headingIV) The actions to be taken by the Federal Reserve

Correct Answer
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Which of the following combinations will result in a sharply-increasing yield curve?

Correct Answer
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An upward-sloping yield curve

Correct Answer
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An upward sloping yield curve is a(n) _______ yield curve.

Correct Answer
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The ___________ yield curve is created from stripped treasuries.

Correct Answer
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$\begin{array}{cc}\text { Year } & \text { 1-Year Forward Rate } \\1 & 4.6\% \\2 &4.9\% \\3 & 5.2\% \\4 & 5.5\% \\5 &6.8\%\end{array}$ What should the purchase price of a 4-year zero-coupon bond be if it is purchased today and has face value of $1,000?

Correct Answer
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Exam 15: The Term Structure of Interest Rates

If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows) ,

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The graphic representation of the term structure of interest rates is the _______________.

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Treasury STRIPS are

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The yield curve

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Which of the following are possible explanations for the term structure of interest rates?

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The yield curve shows at any point in time

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Correct AnswerverifiedShow Answer

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What theory believes short-term investors dominate the market so that the forward rate will generally exceed the expected short rate?

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The yield curve is a component of

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The "break-even" interest rate for year n that equates the return on an n-period zero-coupon bond to that of an n - 1 - period zero-coupon bond rolled over into a one-year bond in year n is defined as

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Investors can use publicly available financial data to determine which of the following?I) The shape of the yield curveII) Expected future short-term rates (if liquidity premiums are ignored) III) The direction the Dow indexes are headingIV) The actions to be taken by the Federal Reserve

Correct AnswerverifiedShow Answer

Which of the following combinations will result in a sharply-increasing yield curve?

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An upward-sloping yield curve

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An upward sloping yield curve is a(n) _______ yield curve.

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Correct AnswerverifiedShow Answer

The ___________ yield curve is created from stripped treasuries.

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Correct AnswerverifiedShow Answer

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