Question 1

With reference to the data above, the default risk premium on the 90-day commercial paper above is

Accepted Answer

A)  3.39% 
B)  0.17% 
C)  0.64% 
D)  1.84% 
A)  3.39% 
B)  0.17% 
C)  0.64% 
D)  1.84%

Question 2

An upward sloping yield curve indicates that security investors expect future interest rates to _____ and security prices to ______.

Accepted Answer

A)  fall; fall. 
B)  fall; rise. 
C)  rise; fall. 
D)  rise; rise. 
A)  fall; fall. 
B)  fall; rise. 
C)  rise; fall. 
D)  rise; rise.

Question 3

Yield difference in Treasury securities of varied maturities may be explained by

Accepted Answer

A)  marketability. 
B)  default risk. 
C)  expectations of future inflation. 
D)  all of the above 
E)  none of the above
Use the following interest rate data to answer the next five questions:
Treasury Bills, 90 days 4.20%
Commercial Paper, 90 days 4.84%
Treasury Bill, 1 year 4.67%
Treasury Note, 2 year 5.25%
Corporate Bond AA, 20 year 8.23%
Municipal Bond AA, 20 year 6.42%
Expected Annual Inflation Rate 3.00% 
A)  marketability. 
B)  default risk. 
C)  expectations of future inflation. 
D)  all of the above 
E)  none of the above
Use the following interest rate data to answer the next five questions:
Treasury Bills, 90 days 4.20%
Commercial Paper, 90 days 4.84%
Treasury Bill, 1 year 4.67%
Treasury Note, 2 year 5.25%
Corporate Bond AA, 20 year 8.23%
Municipal Bond AA, 20 year 6.42%
Expected Annual Inflation Rate 3.00%

Question 4

List the five basic factors which explain the differences in interest rates on different securities at any point in time.

Accepted Answer

The five basic factors which may explain

Question 5

Default risk premiums are usually smaller during periods of high economic growth.

Accepted Answer

A) True 
 B)False

Question 6

Consider a yield curve that has taken into consideration both the expectations theory and the liquidity premium theory. Assume the yield curve is initially downward sloping. If liquidity premium theory is no longer important, the yield curve you would expect to see would be:

Accepted Answer

A)  more steeply downward sloping 
B)  more upward sloping 
C)  less steeply downward sloping 
D)  flat 
E)  Either c or d can happen. 
A)  more steeply downward sloping 
B)  more upward sloping 
C)  less steeply downward sloping 
D)  flat 
E)  Either c or d can happen.

Question 7

31 Yield differences between two securities may be explained by differences in

Accepted Answer

A)  maturity. 
B)  default risk. 
C)  marketability. 
D)  call provision. 
E)  all of the above 
A)  maturity. 
B)  default risk. 
C)  marketability. 
D)  call provision. 
E)  all of the above

Question 8

Bonds are called speculative grade or junk bonds if their Standard & Poor's rating is

Accepted Answer

A)  above BBB. 
B)  below BBB. 
C)  B and below. 
D)  A and below 
A)  above BBB. 
B)  below BBB. 
C)  B and below. 
D)  A and below

Question 9

Bond A is not putable; bond B is putable. Investors will require a lower yield on bond __ and will pay ____ for the bond.

Accepted Answer

A)  A; less 
B)  A; more 
C)  B; less 
D)  B; more 
A)  A; less 
B)  A; more 
C)  B; less 
D)  B; more

Question 10

Putable bonds offer higher yields than similar non-putable bonds

Accepted Answer

A) True 
 B)False

Question 11

A two-year interest rate is 7% and a one-year forward rate one year from now is 8%. According to the expectations theory, what is the current one-year rate?

Accepted Answer

A)  6.0% 
B)  6.5% 
C)  7.0% 
D)  8.0% 
E)  9.0% 
A)  6.0% 
B)  6.5% 
C)  7.0% 
D)  8.0% 
E)  9.0%

Question 12

Which of the following statements is true?

Accepted Answer

A)  Convertible bonds offer higher yields than similar nonconvertible bonds. 
B)  Putable bonds offer higher yields than similar nonputable bonds. 
C)  Bonds with call options must offer higher interest rates than similar noncallable bonds. 
D)  All Treasury securities offer lower rates than any securities issued by business firms. 
E)  All of the above statements are true. 
A)  Convertible bonds offer higher yields than similar nonconvertible bonds. 
B)  Putable bonds offer higher yields than similar nonputable bonds. 
C)  Bonds with call options must offer higher interest rates than similar noncallable bonds. 
D)  All Treasury securities offer lower rates than any securities issued by business firms. 
E)  All of the above statements are true.

Question 13

Federal Agency securities have higher yields than similar Treasury securities because they

Accepted Answer

A)  have greater default risk. 
B)  have shorter maturities. 
C)  are less marketable. 
D)  both a and c 
A)  have greater default risk. 
B)  have shorter maturities. 
C)  are less marketable. 
D)  both a and c

Question 14

According to the expectations theory, what is the one-year forward rate three years from now if three and four-year spot rates are 5.50% and 5.80%, respectively?

Accepted Answer

A)  The rate cannot be calculated from the information above. 
B)  6.2% 
C)  6.7% 
D)  5.6% 
E)  5.8% 
A)  The rate cannot be calculated from the information above. 
B)  6.2% 
C)  6.7% 
D)  5.6% 
E)  5.8%

Question 15

Expected lower rates of inflation will lead to an upward sloping yield curve.

Accepted Answer

A) True 
 B)False

Question 16

A descending yield curve forecasts higher short-term rates in the future.

Accepted Answer

A) True 
 B)False

Question 17

What shapes of the yield curve can be explained by each of the theories of the term structure of interest rates?

Accepted Answer

Different theories of the term structure

Question 18

Callable bonds have higher market yields than otherwise similar noncallable bonds.

Accepted Answer

A) True 
 B)False

Question 19

According to the expectation theory

Accepted Answer

A)  markets are segmented and buyers stay in their own segment 
B)  the long term spot rate is an average of the current and expected future short term interest rates c the term structure will most often be upward sloping
D liquidity premiums are negative and time varying 
A)  markets are segmented and buyers stay in their own segment 
B)  the long term spot rate is an average of the current and expected future short term interest rates c the term structure will most often be upward sloping
D liquidity premiums are negative and time varying

Question 20

An issuer of a bond is more likely to exercise a call option on the bond after an increase in interest rates.

Accepted Answer

A)  a decrease in interest rates. 
B)  a decrease in the bond's price. 
C)  a downgrade of the bond's rating by Moody's. 
A)  a decrease in interest rates. 
B)  a decrease in the bond's price. 
C)  a downgrade of the bond's rating by Moody's.

With reference to the data above, the default risk premium on the 90-day commercial paper above is

An upward sloping yield curve indicates that security investors expect future interest rates to _ and security prices to __.

Yield difference in Treasury securities of varied maturities may be explained by

List the five basic factors which explain the differences in interest rates on different securities at any point in time.

Default risk premiums are usually smaller during periods of high economic growth.

Consider a yield curve that has taken into consideration both the expectations theory and the liquidity premium theory. Assume the yield curve is initially downward sloping. If liquidity premium theory is no longer important, the yield curve you would expect to see would be:

31 Yield differences between two securities may be explained by differences in

Bonds are called speculative grade or junk bonds if their Standard & Poor's rating is

Bond A is not putable; bond B is putable. Investors will require a lower yield on bond and will pay __ for the bond.

Putable bonds offer higher yields than similar non-putable bonds

A two-year interest rate is 7% and a one-year forward rate one year from now is 8%. According to the expectations theory, what is the current one-year rate?

Which of the following statements is true?

Federal Agency securities have higher yields than similar Treasury securities because they

According to the expectations theory, what is the one-year forward rate three years from now if three and four-year spot rates are 5.50% and 5.80%, respectively?

Expected lower rates of inflation will lead to an upward sloping yield curve.

A descending yield curve forecasts higher short-term rates in the future.

What shapes of the yield curve can be explained by each of the theories of the term structure of interest rates?

Callable bonds have higher market yields than otherwise similar noncallable bonds.

According to the expectation theory

An issuer of a bond is more likely to exercise a call option on the bond after an increase in interest rates.

An Overview of Financial Markets and Institutions

The Federal Reserve and Its Powers

The Fed and Interest Rates

The Level of Interest Rates

Bond Prices and Interest Rate Risk

Money Markets

Bond Markets

Mortgage Markets

Equity Markets

Derivatives Markets

International Markets

Commercial Bank Operations

International Banking

Regulation of Financial Institutions

Thrift Institutions and Finance Companies

Insurance Companies and Pension Funds

Investment Banking

Investment Companies

Risk Management in Financial Institutions

Filters

Exam 6: The Structure of Interest Rates

With reference to the data above, the default risk premium on the 90-day commercial paper above is

An upward sloping yield curve indicates that security investors expect future interest rates to _____ and security prices to ______.

Yield difference in Treasury securities of varied maturities may be explained by

List the five basic factors which explain the differences in interest rates on different securities at any point in time.

Default risk premiums are usually smaller during periods of high economic growth.

Consider a yield curve that has taken into consideration both the expectations theory and the liquidity premium theory. Assume the yield curve is initially downward sloping. If liquidity premium theory is no longer important, the yield curve you would expect to see would be:

31 Yield differences between two securities may be explained by differences in

Bonds are called speculative grade or junk bonds if their Standard & Poor's rating is

Bond A is not putable; bond B is putable. Investors will require a lower yield on bond __ and will pay ____ for the bond.

Putable bonds offer higher yields than similar non-putable bonds

A two-year interest rate is 7% and a one-year forward rate one year from now is 8%. According to the expectations theory, what is the current one-year rate?

Which of the following statements is true?

Federal Agency securities have higher yields than similar Treasury securities because they

According to the expectations theory, what is the one-year forward rate three years from now if three and four-year spot rates are 5.50% and 5.80%, respectively?

Expected lower rates of inflation will lead to an upward sloping yield curve.

A descending yield curve forecasts higher short-term rates in the future.

What shapes of the yield curve can be explained by each of the theories of the term structure of interest rates?

Callable bonds have higher market yields than otherwise similar noncallable bonds.

According to the expectation theory

An issuer of a bond is more likely to exercise a call option on the bond after an increase in interest rates.

An Overview of Financial Markets and Institutions

The Federal Reserve and Its Powers

The Fed and Interest Rates

The Level of Interest Rates

Bond Prices and Interest Rate Risk

Money Markets

Bond Markets

Mortgage Markets

Equity Markets

Derivatives Markets

International Markets

Commercial Bank Operations

International Banking

Regulation of Financial Institutions

Thrift Institutions and Finance Companies

Insurance Companies and Pension Funds

Investment Banking

Investment Companies

Risk Management in Financial Institutions

Filters

An upward sloping yield curve indicates that security investors expect future interest rates to _ and security prices to __.

Bond A is not putable; bond B is putable. Investors will require a lower yield on bond and will pay __ for the bond.