Question 1

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

Question 2

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?

Accepted Answer

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

Question 3

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

Question 4

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. 
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.

Question 5

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 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 
E)  Constant future expected short rates and increasing liquidity premiums

Question 6

$\begin{array}{cc}
\text { Year } & \text { 1-Year Forward Rate } \
1 & 4.6\% \
2 &4.9\% \
3 & 5.2\% \
4 & 5.5\% \
5 &6.8\%
\end{array}$
 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?

Accepted Answer

A)  $966.87 
B)  $911.37 
C)  $950.21 
D)  $956.02 
E)  $945.51 
A)  $966.87 
B)  $911.37 
C)  $950.21 
D)  $956.02 
E)  $945.51

Question 7

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. 
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.

Question 8

$\begin{array}{cc}
\text { Year } & \text { 1-Year Forward Rate } \
1 & 4.6\% \
2 &4.9\% \
3 & 5.2\% \
4 & 5.5\% \
5 &6.8\%
\end{array}$
 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?

Accepted Answer

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

Question 9

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. 
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.

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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. 
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.

Question 15

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 16

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $$\begin{array} { c c } 
\text { Maturity } & \text { Price } \
\text { (Years) } & \
1 & \$ 943.40 \
2 & 881.68 \
3 & 808.88 \
4 & 742.05
\end{array}$$ 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. 
A)  7.00% 
B)  7.33% 
C)  9.00% 
D)  11.19% 
E)  None of the options are correct.

Question 17

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 18

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. 
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.

Question 19

$\begin{array}{cc}
\text { Year } & \text { 1-Year Forward Rate } \
1 & 4.6\% \
2 &4.9\% \
3 & 5.2\% \
4 & 5.5\% \
5 &6.8\%
\end{array}$
 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?

Accepted Answer

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

Question 20

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

Exam 15: The Term Structure of Interest Rates

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

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

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

Treasury STRIPS are

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

Year 1-Year Forward Rate 1 4.6\% 2 4.9\% 3 5.2\% 4 5.5\% 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?

An upward-sloping yield curve

Year 1-Year Forward Rate 1 4.6\% 2 4.9\% 3 5.2\% 4 5.5\% 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?

The yield curve shows at any point in time

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

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

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

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

The yield curve is a component of

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

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

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

The yield curve

Year 1-Year Forward Rate 1 4.6\% 2 4.9\% 3 5.2\% 4 5.5\% 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?

The ___________ yield curve is created from stripped treasuries.

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