Question 1

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. 
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.

Question 2

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) $893.36 
A) $877.54 
B) $888.33 
C) $883.32 
D) $893.36

Question 3

What is the yield to maturity of a 3-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 4

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000.   What is the yield to maturity on a 3-year zero-coupon bond?

Accepted Answer

A) 6.37% 
B) 9.00% 
C) 7.33% 
D) 10.00% 
A) 6.37% 
B) 9.00% 
C) 7.33% 
D) 10.00%

Question 5

Suppose that all investors expect that interest rates for the 4 years will be as follows:   If you have just purchased a 4-year zero-coupon bond, what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000)

Accepted Answer

A) 5% 
B) 7% 
C) 9% 
D) 10% 
A) 5% 
B) 7% 
C) 9% 
D) 10%

Question 6

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. 
A) the forward rate. 
B) the short rate. 
C) the yield to maturity. 
D) the discount rate.

Question 7

Suppose that all investors expect that interest rates for the 4 years will be as follows:   What is the price of 3-year zero-coupon bond with a par value of $1,000?

Accepted Answer

A) $889.08 
B) $816.58 
C) $772.18 
D) $765.55 
A) $889.08 
B) $816.58 
C) $772.18 
D) $765.55

Question 8

The most recently issued Treasury securities are called

Accepted Answer

A) on the run. 
B) off the run. 
C) on the market. 
D) off the market. 
A) on the run. 
B) off the run. 
C) on the market. 
D) off the market.

Question 9

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 theory 
A) The expectations theory 
B) The liquidity preference theory 
C) Modern portfolio theory 
D) The expectations theory and the liquidity preference theory

Question 10

According to the expectations hypothesis, an upward-sloping yield curve implies that

Accepted Answer

A) interest rates are expected to remain stable in the future. 
B) interest rates are expected to decline in the future. 
C) interest rates are expected to increase in the future. 
D) interest rates are expected to decline first, then increase. 
A) interest rates are expected to remain stable in the future. 
B) interest rates are expected to decline in the future. 
C) interest rates are expected to increase in the future. 
D) interest rates are expected to decline first, then increase.

Question 11

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. 
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.

Question 12

When computing yield to maturity, the implicit reinvestment assumption is that the interest payments are reinvested at the

Accepted Answer

A) coupon rate. 
B) current yield. 
C) yield to maturity at the time of the investment. 
D) prevailing yield to maturity at the time interest payments are received. 
A) coupon rate. 
B) current yield. 
C) yield to maturity at the time of the investment. 
D) prevailing yield to maturity at the time interest payments are received.

Question 13

Suppose that all investors expect that interest rates for the 4 years will be as follows:   If you have just purchased a 4-year zero-coupon bond, what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000.)

Accepted Answer

A) 5% 
B) 3% 
C) 9% 
D) 10% 
A) 5% 
B) 3% 
C) 9% 
D) 10%

Question 14

The on the run yield curve is

Accepted Answer

A) a plot of yield as a function of maturity for zero-coupon bonds. 
B) a plot of yield as a function of maturity for recently-issued coupon bonds trading at or near par. 
C) a plot of yield as a function of maturity for corporate bonds with different risk ratings. 
D) a plot of liquidity premiums for different maturities. 
A) a plot of yield as a function of maturity for zero-coupon bonds. 
B) a plot of yield as a function of maturity for recently-issued coupon bonds trading at or near par. 
C) a plot of yield as a function of maturity for corporate bonds with different risk ratings. 
D) a plot of liquidity premiums for different maturities.

Question 15

Calculate the price at the beginning of year 1 of a 10% annual coupon bond with face value $1,000 and 5 years to maturity.

Accepted Answer

A) $1,105 
B) $1,132 
C) $1,179 
D) $1,150 
A) $1,105 
B) $1,132 
C) $1,179 
D) $1,150

Question 16

If the value of a Treasury bond was higher 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 17

Given the bond described above, if interest were paid semi-annually (rather than annually), and the bond continued to be priced at $850, the resulting effective annual yield to maturity would be

Accepted Answer

A) less than 12%. 
B) more than 12%. 
C) 12%. 
D) Cannot be determined. 
A) less than 12%. 
B) more than 12%. 
C) 12%. 
D) Cannot be determined.

Question 18

If the value of a Treasury bond was higher 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. 
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.

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),

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?

What is the yield to maturity of a 3-year bond?

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. What is the yield to maturity on a 3-year zero-coupon bond?

Suppose that all investors expect that interest rates for the 4 years will be as follows: If you have just purchased a 4-year zero-coupon bond, what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000)

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

Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the price of 3-year zero-coupon bond with a par value of $1,000?

The most recently issued Treasury securities are called

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

According to the expectations hypothesis, an upward-sloping yield curve implies that

The yield curve

When computing yield to maturity, the implicit reinvestment assumption is that the interest payments are reinvested at the

The on the run yield curve is

Calculate the price at the beginning of year 1 of a 10% annual coupon bond with face value $1,000 and 5 years to maturity.

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

Given the bond described above, if interest were paid semi-annually (rather than annually), and the bond continued to be priced at $850, the resulting effective annual yield to maturity would be

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

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