Question 1

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. 
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. C

Question 2

Calculate the price at the beginning of year 1 of an 8% annual coupon bond with face value $1,000 and 5 years to maturity.

Accepted Answer

A) $1,105.47 
B) $1,131.91 
C) $1,084.25 
D) $1,150.01 
A) $1,105.47 
B) $1,131.91 
C) $1,084.25 
D) $1,150.01 C

Question 3

Suppose that all investors expect that interest rates for the 4 years will be as follows:   What is the price of a 2-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000)

Accepted Answer

A) $1,092 
B) $1,054 
C) $1,000 
D) $1,073 
A) $1,092 
B) $1,054 
C) $1,000 
D) $1,073 D

Question 4

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. 
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.

Question 5

Given the yield on a 3-year zero-coupon bond is 7.2% and forward rates of 6.1% in year 1 and 6.9% in year 2, what must be the forward rate in year 3?

Accepted Answer

A) 8.4% 
B) 8.6% 
C) 8.1% 
D) 8.9% 
A) 8.4% 
B) 8.6% 
C) 8.1% 
D) 8.9%

Question 6

Structure of interest rates is

Accepted Answer

A) the relationship between the rates of interest on all securities. 
B) the relationship between the interest rate on a security and its time to maturity. 
C) the relationship between the yield on a bond and its default rate. 
D) All of the options are correct. 
A) the relationship between the rates of interest on all securities. 
B) the relationship between the interest rate on a security and its time to maturity. 
C) the relationship between the yield on a bond and its default rate. 
D) All of the options are correct.

Question 7

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000.   According to the expectations theory, what is the expected forward rate in the third year?

Accepted Answer

A) 7.23% 
B) 9.37% 
C) 9.00% 
D) 10.9% 
A) 7.23% 
B) 9.37% 
C) 9.00% 
D) 10.9%

Question 8

What would the yield to maturity be on a four-year zero-coupon bond purchased today?

Accepted Answer

A) 5.80% 
B) 7.30% 
C) 6.65% 
D) 7.25% 
A) 5.80% 
B) 7.30% 
C) 6.65% 
D) 7.25%

Question 9

What should the purchase price of a 5-year zero-coupon bond be if it is purchased today and has face value of $1,000?

Accepted Answer

A) $776.14 
B) $721.15 
C) $779.54 
D) $756.02 
A) $776.14 
B) $721.15 
C) $779.54 
D) $756.02

Question 10

Suppose that all investors expect that interest rates for the 4 years will be as follows:   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) $1,028.51 
D) $1,073.34 
A) $1,092.97 
B) $1,054.24 
C) $1,028.51 
D) $1,073.34

Question 11

Given the bond described above, if interest were paid semi-annually (rather than annually) and the bond continued to be priced at $917.99, the resulting effective annual yield to maturity would be

Accepted Answer

A) less than 10%. 
B) more than 10%. 
C) 10%. 
D) Cannot be determined. 
A) less than 10%. 
B) more than 10%. 
C) 10%. 
D) Cannot be determined.

Question 12

What should the purchase price of a 2-year zero-coupon bond be if it is purchased at the beginning of year 2 and has face value of $1,000?

Accepted Answer

A) $877.54 
B) $888.33 
C) $883.32 
D) $894.21 
A) $877.54 
B) $888.33 
C) $883.32 
D) $894.21

Question 13

Given the yield on a 3-year zero-coupon bond is 7% and forward rates of 6% in year 1 and 6.5% in year 2, what must be the forward rate in year 3?

Accepted Answer

A) 7.2% 
B) 8.6% 
C) 8.5% 
D) 6.9% 
A) 7.2% 
B) 8.6% 
C) 8.5% 
D) 6.9%

Question 14

Suppose that all investors expect that interest rates for the 4 years will be as follows:   What is the yield to maturity of a 3-year zero-coupon bond?

Accepted Answer

A) 7.03% 
B) 9.00% 
C) 6.99% 
D) 7.49% 
A) 7.03% 
B) 9.00% 
C) 6.99% 
D) 7.49%

Question 15

What is the yield to maturity of a 5-year bond?

Accepted Answer

A) 4.6% 
B) 4.9% 
C) 5.2% 
D) 5.5% 
A) 4.6% 
B) 4.9% 
C) 5.2% 
D) 5.5%

Question 16

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. 
A) the Dow Jones Industrial Average. 
B) the consumer price index. 
C) the index of leading economic indicators. 
D) the producer price index.

Question 17

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

Accepted Answer

A) profit by buying the stripped cash flows and reconstituting the bond. 
B) not profit by buying the stripped cash flows and reconstituting the bond. 
C) profit by buying the bond and creating STRIPS. 
D) not profit by buying the stripped cash flows and reconstituting the bond and profit by buying the bond and creating STRIPS. 
A) profit by buying the stripped cash flows and reconstituting the bond. 
B) not profit by buying the stripped cash flows and reconstituting the bond. 
C) profit by buying the bond and creating STRIPS. 
D) not profit by buying the stripped cash flows and reconstituting the bond and profit by buying the bond and creating STRIPS.

Question 18

What is the yield to maturity of a 4-year bond?

Accepted Answer

A) 4.69% 
B) 4.95% 
C) 5.02% 
D) 5.05% 
A) 4.69% 
B) 4.95% 
C) 5.02% 
D) 5.05%

Question 19

What should the purchase price of a 1-year zero-coupon bond be if it is purchased today and has face value of $1,000?

Accepted Answer

A) $966.37 
B) $912.87 
C) $950.21 
D) $956.02 
A) $966.37 
B) $912.87 
C) $950.21 
D) $956.02

Question 20

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 
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

Exam 15: The Term Structure of Interest Rates

The yield curve shows at any point in time

Calculate the price at the beginning of year 1 of an 8% annual coupon bond with face value $1,000 and 5 years to maturity.

Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the price of a 2-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000)

An upward-sloping yield curve

Given the yield on a 3-year zero-coupon bond is 7.2% and forward rates of 6.1% in year 1 and 6.9% in year 2, what must be the forward rate in year 3?

Structure of interest rates is

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. According to the expectations theory, what is the expected forward rate in the third year?

What would the yield to maturity be on a four-year zero-coupon bond purchased today?

What should the purchase price of a 5-year zero-coupon bond be if it is purchased today and has face value of $1,000?

Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the price of a 2-year maturity bond with a 5% coupon rate paid annually? (Par value = $1,000.)

Given the bond described above, if interest were paid semi-annually (rather than annually) and the bond continued to be priced at $917.99, the resulting effective annual yield to maturity would be

What should the purchase price of a 2-year zero-coupon bond be if it is purchased at the beginning of year 2 and has face value of $1,000?

Given the yield on a 3-year zero-coupon bond is 7% and forward rates of 6% in year 1 and 6.5% in year 2, what must be the forward rate in year 3?

Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the yield to maturity of a 3-year zero-coupon bond?

What is the yield to maturity of a 5-year bond?

The yield curve is a component of

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

What is the yield to maturity of a 4-year bond?

What should the purchase price of a 1-year zero-coupon bond be if it is purchased today and has face value of $1,000?

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

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