Question 1

If the pure expectations theory holds,which of the following statements is CORRECT?

Accepted Answer

A)   The yield curve for both Treasury and corporate bonds should be flat.
B)   The yield curve for Treasury securities would be flat,but the yield curve for corporate securities might be downward sloping.
C)   The yield curve for Treasury securities cannot be downward sloping.
D)   The maturity risk premium would be zero.
E)   If 2-year bonds yield more than 1-year bonds,an investor with a 2-year time horizon would almost certainly end up with more money if he or she bought 2-year bonds.F) A) and D)
G) A) and B)

Question 2

The four most fundamental factors that affect the cost of money are (1)production opportunities, (2)time preferences for consumption, (3)risk,and (4)weather conditions.

Accepted Answer

A) True 
 B)False

Question 3

Assume that inflation is expected to decline steadily in the future,but that the real risk-free rate,r*,will remain constant.Which of the following statements is CORRECT,other things held constant?

Accepted Answer

A)   If the pure expectations theory holds,the Treasury yield curve must be downward sloping.
B)   If the pure expectations theory holds,the corporate yield curve must be downward sloping.
C)   If there is a positive maturity risk premium,the Treasury yield curve must be upward sloping.
D)   If inflation is expected to decline,there can be no maturity risk premium.
E)   The expectations theory cannot hold if inflation is decreasing.F) B) and C)
G) C) and D)

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)   Even if the pure expectations theory is correct,there might at times be an inverted Treasury yield curve.
B)   If the yield curve is inverted,short-term bonds have lower yields than long-term bonds.
C)   The higher the maturity risk premium,the higher the probability that the yield curve will be inverted.
D)   Inverted yield curves can exist for Treasury bonds,but because of default premiums,the corporate yield curve cannot become inverted.
E)   The most likely explanation for an inverted yield curve is that investors expect inflation to increase in the future.F) C) and D)
G) B) and E)

Question 5

Suppose the real risk-free rate is 3.00%,the average expected future inflation rate is 4.00%,and a maturity risk premium of 0.10% per year to maturity applies,i.e. ,MRP = 0.10%(t) ,where t is the years to maturity.What rate of return would you expect on a 1-year Treasury security,assuming the pure expectations theory is NOT valid? Include the cross-product term,i.e. ,if averaging is required,use the geometric average.(Round your final answer to 2 decimal places. )

Accepted Answer

A)   8.88%
B)   7.15%
C)   7.22%
D)   7.80%
E)   8.95%F) C) and D)
G) All of the above

Question 6

If 10-year T-bonds have a yield of 6.2%,10-year corporate bonds yield 7.9%,the maturity risk premium on all 10-year bonds is 1.3%,and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds,what is the default risk premium on the corporate bond?

Accepted Answer

A)   1.46%
B)   1.30%
C)   1.60%
D)   1.51%
E)   1.40%F) A) and B)
G) A) and C)

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)   The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond.
B)   The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond.
C)   The yield on a 3-year Treasury bond should always exceed the yield on a 2-year Treasury bond.
D)   If inflation is expected to increase,then the yield on a 2-year bond should exceed that on a 3-year bond.
E)   The real risk-free rate should increase if people expect inflation to increase.F) A) and C)
G) C) and E)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   Downward sloping yield curves are inconsistent with the expectations theory.
B)   The actual shape of the yield curve depends only on expectations about future inflation.
C)   If the pure expectations theory is correct,a downward sloping yield curve indicates that interest rates are expected to decline in the future.
D)   If the yield curve is upward sloping,the maturity risk premium must be positive and the inflation rate must be zero.
E)   Yield curves must be either upward or downward sloping - they cannot first rise and then decline.F) C) and E)
G) A) and B)

Question 9

Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 4.10%.What rate of return would you expect on a 1-year Treasury security,assuming the pure expectations theory is valid? Include cross-product terms,i.e. ,if averaging is required,use the geometric average.(Round your final answer to 2 decimal places. )

Accepted Answer

A)   6.58%
B)   7.74%
C)   9.37%
D)   6.50%
E)   7.90%F) B) and E)
G) D) and E)

Question 10

Suppose the real risk-free rate is 4.20%,the average expected future inflation rate is 2.50%,and a maturity risk premium of 0.10% per year to maturity applies,i.e. ,MRP = 0.10%(t) ,where t is the number of years to maturity,hence the pure expectations theory is NOT valid.What rate of return would you expect on a 4-year Treasury security? Disregard cross-product terms,i.e. ,if averaging is required,use the arithmetic average.

Accepted Answer

A)   7.67%
B)   7.10%
C)   7.53%
D)   6.96%
E)   5.40%F) B) and D)
G) B) and C)

Question 11

If the pure expectations theory is correct (that is,the maturity risk premium is zero) ,which of the following is CORRECT?

Accepted Answer

A)   An upward-sloping Treasury yield curve means that the market expects interest rates to decline in the future.
B)   A 5-year T-bond would always yield less than a 10-year T-bond.
C)   The yield curve for corporate bonds may be upward sloping even if the Treasury yield curve is flat.
D)   The yield curve for stocks must be above that for bonds,but both yield curves must have the same slope.
E)   If the maturity risk premium is zero for Treasury bonds,then it must be negative for corporate bonds.F) B) and C)
G) A) and E)

Question 12

Assume that the current corporate bond yield curve is upward sloping.Under this condition,then we could be sure that

Accepted Answer

A)   Inflation is expected to decline in the future.
B)   The economy is not in a recession.
C)   Long-term bonds are a better buy than short-term bonds.
D)   Maturity risk premiums could help to explain the yield curve's upward slope.
E)   Long-term interest rates are more volatile than short-term rates.F) B) and E)
G) B) and C)

Question 13

Suppose the real risk-free rate is 3.00%,the average expected future inflation rate is 5.90%,and a maturity risk premium of 0.10% per year to maturity applies,i.e. ,MRP = 0.10%(t) ,where t is the number of years to maturity.What rate of return would you expect on a 1-year Treasury security,assuming the pure expectations theory is NOT valid? Disregard cross-product terms,i.e. ,if averaging is required,use the arithmetic average.

Accepted Answer

A)   9.27%
B)   8.91%
C)   7.29%
D)   9.00%
E)   10.35%F) B) and D)
G) A) and E)

Question 14

Suppose the federal deficit increased sharply from one year to the next,and the Federal Reserve kept the money supply constant.Other things held constant,we would expect to see interest rates decline.

Accepted Answer

A) True 
 B)False

Question 15

The real risk-free rate is expected to remain constant at 3% in the future,a 2% rate of inflation is expected for the next 2 years,after which inflation is expected to increase to 4%,and there is a positive maturity risk premium that increases with years to maturity.Given these conditions,which of the following statements is CORRECT?

Accepted Answer

A)   The yield on a 2-year T-bond must exceed that on a 5-year T-bond.
B)   The yield on a 5-year Treasury bond must exceed that on a 2-year Treasury bond.
C)   The yield on a 7-year Treasury bond must exceed that of a 5-year corporate bond.
D)   The conditions in the problem cannot all be true--they are internally inconsistent.
E)   The Treasury yield curve under the stated conditions would be humped rather than have a consistent positive or negative slope.F) D) and E)
G) None of the above

Question 16

If the Treasury yield curve is downward sloping,how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?

Accepted Answer

A)   The yield on a 10-year bond would be less than that on a 1-year bill.
B)   The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium.
C)   It is impossible to tell without knowing the coupon rates of the bonds.
D)   The yields on the two securities would be equal.
E)   It is impossible to tell without knowing the relative risks of the two securities.F) A) and E)
G) B) and D)

Question 17

One of the four most fundamental factors that affect the cost of money as discussed in the text is the expected rate of inflation.If inflation is expected to be relatively high,then interest rates will tend to be relatively low,other things held constant.

Accepted Answer

A) True 
 B)False

Question 18

The four most fundamental factors that affect the cost of money are (1)production opportunities, (2)time preferences for consumption, (3)risk,and (4)inflation.

Accepted Answer

A) True 
 B)False

Question 19

A bond trader observes the following information:  The Treasury yield curve is downward sloping.  Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds.  Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields. On the basis of this information,which of the following statements is most CORRECT?

Accepted Answer

A)   A 10-year corporate bond must have a higher yield than a 5-year Treasury bond.
B)   A 10-year Treasury bond must have a higher yield than a 10-year corporate bond.
C)   A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.
D)   The corporate yield curve must be flat.
E)   Since the Treasury yield curve is downward sloping,the corporate yield curve must also be downward sloping.F) A) and B)
G) B) and E)

Question 20

The "yield curve" shows the relationship between bonds' maturities and their yields.

Accepted Answer

A) True 
 B)False

Exam 6: Interest Rates

The "yield curve" shows the relationship between bonds' maturities and their yields.

Correct Answer
verified

Assume that the current corporate bond yield curve is upward sloping.Under this condition,then we could be sure that

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

If the Treasury yield curve is downward sloping,how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?

Correct Answer
verified

The four most fundamental factors that affect the cost of money are (1)production opportunities, (2)time preferences for consumption, (3)risk,and (4)inflation.

Correct Answer
verified

Suppose the federal deficit increased sharply from one year to the next,and the Federal Reserve kept the money supply constant.Other things held constant,we would expect to see interest rates decline.

Correct Answer
verified

Correct Answer
verified

Assume that inflation is expected to decline steadily in the future,but that the real risk-free rate,r*,will remain constant.Which of the following statements is CORRECT,other things held constant?

Correct Answer
verified

If the pure expectations theory holds,which of the following statements is CORRECT?

Correct Answer
verified

If the pure expectations theory is correct (that is,the maturity risk premium is zero) ,which of the following is CORRECT?

Correct Answer
verified

If 10-year T-bonds have a yield of 6.2%,10-year corporate bonds yield 7.9%,the maturity risk premium on all 10-year bonds is 1.3%,and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds,what is the default risk premium on the corporate bond?

Correct Answer
verified

One of the four most fundamental factors that affect the cost of money as discussed in the text is the expected rate of inflation.If inflation is expected to be relatively high,then interest rates will tend to be relatively low,other things held constant.

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

The four most fundamental factors that affect the cost of money are (1)production opportunities, (2)time preferences for consumption, (3)risk,and (4)weather conditions.

Correct Answer
verified

Correct Answer
verified

Exam 6: Interest Rates

The "yield curve" shows the relationship between bonds' maturities and their yields.

Correct AnswerverifiedShow Answer

Assume that the current corporate bond yield curve is upward sloping.Under this condition,then we could be sure that

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If the Treasury yield curve is downward sloping,how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?

Correct AnswerverifiedShow Answer

The four most fundamental factors that affect the cost of money are (1)production opportunities, (2)time preferences for consumption, (3)risk,and (4)inflation.

Correct AnswerverifiedShow Answer

Suppose the federal deficit increased sharply from one year to the next,and the Federal Reserve kept the money supply constant.Other things held constant,we would expect to see interest rates decline.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Assume that inflation is expected to decline steadily in the future,but that the real risk-free rate,r*,will remain constant.Which of the following statements is CORRECT,other things held constant?

Correct AnswerverifiedShow Answer

If the pure expectations theory holds,which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If the pure expectations theory is correct (that is,the maturity risk premium is zero) ,which of the following is CORRECT?

Correct AnswerverifiedShow Answer

If 10-year T-bonds have a yield of 6.2%,10-year corporate bonds yield 7.9%,the maturity risk premium on all 10-year bonds is 1.3%,and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds,what is the default risk premium on the corporate bond?

Correct AnswerverifiedShow Answer

One of the four most fundamental factors that affect the cost of money as discussed in the text is the expected rate of inflation.If inflation is expected to be relatively high,then interest rates will tend to be relatively low,other things held constant.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The four most fundamental factors that affect the cost of money are (1)production opportunities, (2)time preferences for consumption, (3)risk,and (4)weather conditions.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified