Question 1

What theory believes forward rates equals the market consensus of what the future short interest rate will be?

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 2

$\begin{array}{cc}
\text { Year } & \text { 1-Year Forward Rate } \
1 & 4.6\% \
2 &4.9\% \
3 & 5.2\% \
4 & 5.5\% \
5 &6.8\%
\end{array}$
 What is the yield to maturity of a 3-year bond?

Accepted Answer

A)  4.6% 
B)  4.9% 
C)  5.2% 
D)  5.5% 
E)  5.8% 
A)  4.6% 
B)  4.9% 
C)  5.2% 
D)  5.5% 
E)  5.8%

Question 3

$\begin{array}{cc}
\text { Year } & \text { 1 Year Forward Rate } \
1 & 4.5\% \
2 & 5.2\% \
3 & 5.9\% \
4 & 6.3\% \
5 & 6.8 \% \
6 & 7.0\%
\end{array}$
 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)  $1,195 
B)  $1,181 
C)  $1,175 
D)  $1,162 
E)  $1,151 
A)  $1,195 
B)  $1,181 
C)  $1,175 
D)  $1,162 
E)  $1,151

Question 4

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 5

$\begin{array}{cc}
\text { Year } & \text { 1-Year Forward Rate } \
1 & 4.6\% \
2 &4.9\% \
3 & 5.2\% \
4 & 5.5\% \
5 &6.8\%
\end{array}$
 What is the yield to maturity of a 2-year bond?

Accepted Answer

A)  4.6% 
B)  4.9% 
C)  5.2% 
D)  4.7% 
E)  5.8% 
A)  4.6% 
B)  4.9% 
C)  5.2% 
D)  4.7% 
E)  5.8%

Question 6

Given the yield on a 3-year zero-coupon bond is 8.2% and forward rates of 6.3% in year 1 and 7.1% in year 2, what must be the forward rate in year 3?

Accepted Answer

A)  11.84% 
B)  11.27% 
C)  10.95% 
D)  10.87% 
E)  None of the options are correct. 
A)  11.84% 
B)  11.27% 
C)  10.95% 
D)  10.87% 
E)  None of the options are correct.

Question 7

Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{ll}
\text { Year } &\text { Forward Interest Rate }\ 
0 & 4\% \text { (today) } \
1 & 5\% \
2 & 6\%\
3&7\%
\end{array}$  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)  4% 
B)  5% 
C)  6% 
D)  7% 
E)  None of the options are correct. 
A)  4% 
B)  5% 
C)  6% 
D)  7% 
E)  None of the options are correct.

Question 8

Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{ll}
\text { Year } &\text { Forward Interest Rate }\ 
0 & 4\% \text { (today) } \
1 & 5\% \
2 & 6\%\
3&7\%
\end{array}$  What is the yield to maturity of a 3-year zero-coupon bond?

Accepted Answer

A)  9.00% 
B)  7.00% 
C)  5.00% 
D)  4.00% 
E)  None of the options are correct. 
A)  9.00% 
B)  7.00% 
C)  5.00% 
D)  4.00% 
E)  None of the options are correct.

Question 9

$\begin{array}{cc}
\text { Year } & \text { 1-Year Forward Rate } \
1 & 4.6\% \
2 &4.9\% \
3 & 5.2\% \
4 & 5.5\% \
5 &6.8\%
\end{array}$
 What is the yield to maturity of a 4-year bond?

Accepted Answer

A)  4.69% 
B)  4.95% 
C)  5.02% 
D)  5.05% 
E)  5.08% 
A)  4.69% 
B)  4.95% 
C)  5.02% 
D)  5.05% 
E)  5.08%

Question 10

An inverted yield curve is one

Accepted Answer

A)  with a hump in the middle. 
B)  constructed by using convertible bonds. 
C)  that is relatively flat. 
D)  that plots the inverse relationship between bond prices and bond yields. 
E)  that slopes downward. 
A)  with a hump in the middle. 
B)  constructed by using convertible bonds. 
C)  that is relatively flat. 
D)  that plots the inverse relationship between bond prices and bond yields. 
E)  that slopes downward.

Question 11

Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{ll}
\text { Year } &\text { Forward Interest Rate }\ 
0 & 4\% \text { (today) } \
1 & 5\% \
2 & 6\%\
3&7\%
\end{array}$
 What is the price of a 3-year zero-coupon bond with a par value of $1,000?

Accepted Answer

A)  $896.83 
B)  $863.92 
C)  $772.18 
D)  $765.55 
E)  None of the options are correct. 
A)  $896.83 
B)  $863.92 
C)  $772.18 
D)  $765.55 
E)  None of the options are correct.

Question 12

______ can occur if _____.

Accepted Answer

A)  Arbitrage; the law of one price is not violated 
B)  Arbitrage; the law of one price is violated 
C)  Low-risk economic profit; the law of one price is not violated 
D)  Low-risk economic profit; the law of one price is violated 
E)  Arbitrage and low-risk economic profit; the law of one price is violated 
A)  Arbitrage; the law of one price is not violated 
B)  Arbitrage; the law of one price is violated 
C)  Low-risk economic profit; the law of one price is not violated 
D)  Low-risk economic profit; the law of one price is violated 
E)  Arbitrage and low-risk economic profit; the law of one price is violated

Question 13

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $\begin{array}{cc}
\text { Maturity } & \text { Price } \
\text { (Years) } & \
1 & \$ 925.15 \
2 & 862.57 \
3 & 788.66 \
4 & 711.00
\end{array}$

What is the price of a 4-year maturity bond with a 10% coupon rate paid annually? (Par values = $1,000.)

Accepted Answer

A)  $742.09 
B)  $1,222.09 
C)  $1,035.72 
D)  $1,141.84 
A)  $742.09 
B)  $1,222.09 
C)  $1,035.72 
D)  $1,141.84

Question 14

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $\begin{array}{cc}
\text { Maturity } & \text { Price } \
\text { (Years) } & \
1 & \$ 925.15 \
2 & 862.57 \
3 & 788.66 \
4 & 711.00
\end{array}$
 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 15

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.

Question 16

Bond stripping and bond reconstitution offer opportunities for ______, which can occur if the _________ is violated.

Accepted Answer

A)  arbitrage; law of one price 
B)  arbitrage; restrictive covenants 
C)  huge losses; law of one price 
D)  huge losses; restrictive covenants 
A)  arbitrage; law of one price 
B)  arbitrage; restrictive covenants 
C)  huge losses; law of one price 
D)  huge losses; restrictive covenants

Question 17

$\begin{array}{cc}
\text { Year } & \text { 1-Year Forward Rate } \
1 & 5\% \
2 & 5.5\% \
3 & 6.0\% \
4 & 6.5\% \
5 & 7.0\%
\end{array}$
 What would the yield to maturity be on a four-year zero-coupon bond purchased today?

Accepted Answer

A)  5.75% 
B)  6.30% 
C)  5.65% 
D)  5.25% 
A)  5.75% 
B)  6.30% 
C)  5.65% 
D)  5.25%

Question 18

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $\begin{array}{cc}
\text { Maturity } & \text { Price } \
\text { (Years) } & \
1 & \$ 925.15 \
2 & 862.57 \
3 & 788.66 \
4 & 711.00
\end{array}$

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)  8.24% 
A)  6.37% 
B)  9.00% 
C)  7.33% 
D)  8.24%

Question 19

$\begin{array}{lc}
  \text {Par Value  } &\$1,000\
 \text {  Time to Maturity} & \text {18 Years}\
 \text { Coupon } &\text { 9 \% (paid annually) } \
 \text { Current price } &\$917.99\
 \text { Yield to Maturity } &12\%\
 &\
\end{array}$
 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. 
E)  None of the options are correct. 
A)  less than 10%. 
B)  more than 10%. 
C)  10%. 
D)  Cannot be determined. 
E)  None of the options are correct.

Question 20

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. 
E)  interest rates are expected to increase first, then decrease. 
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. 
E)  interest rates are expected to increase first, then decrease.

Exam 15: The Term Structure of Interest Rates

What theory believes forward rates equals the market consensus of what the future short interest rate will be?

Year 1-Year Forward Rate 1 4.6\% 2 4.9\% 3 5.2\% 4 5.5\% 5 6.8\% What is the yield to maturity of a 3-year bond?

Year 1 Year Forward Rate 1 4.5\% 2 5.2\% 3 5.9\% 4 6.3\% 5 6.8\% 6 7.0\% 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.

The on the run yield curve is

Year 1-Year Forward Rate 1 4.6\% 2 4.9\% 3 5.2\% 4 5.5\% 5 6.8\% What is the yield to maturity of a 2-year bond?

Given the yield on a 3-year zero-coupon bond is 8.2% and forward rates of 6.3% in year 1 and 7.1% 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: Year Forward Interest Rate 0 4\% (today) 1 5\% 2 6\% 3 7\% What is the yield to maturity of a 3-year zero-coupon bond?

Year 1-Year Forward Rate 1 4.6\% 2 4.9\% 3 5.2\% 4 5.5\% 5 6.8\% What is the yield to maturity of a 4-year bond?

An inverted yield curve is one

Suppose that all investors expect that interest rates for the 4 years will be as follows: Year Forward Interest Rate 0 4\% (today) 1 5\% 2 6\% 3 7\% What is the price of a 3-year zero-coupon bond with a par value of $1,000?

______ can occur if _____.

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. Maturity Price (Years) 1 \ 925.15 2 862.57 3 788.66 4 711.00 What is the price of a 4-year maturity bond with a 10% coupon rate paid annually? (Par values = $1,000.)

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. Maturity Price (Years) 1 \ 925.15 2 862.57 3 788.66 4 711.00 According to the expectations theory, what is the expected forward rate in the third year?

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

Bond stripping and bond reconstitution offer opportunities for ______, which can occur if the _________ is violated.

Year 1-Year Forward Rate 1 5\% 2 5.5\% 3 6.0\% 4 6.5\% 5 7.0\% What would the yield to maturity be on a four-year zero-coupon bond purchased today?

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. Maturity Price (Years) 1 \ 925.15 2 862.57 3 788.66 4 711.00 What is the yield to maturity on a 3-year zero-coupon bond?

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

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Capital Allocation to Risky Assets

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Filters

__ can occur if _.

Bond stripping and bond reconstitution offer opportunities for , which can occur if the ___ is violated.