Question 1

An inverted yield curve is a valuable forecasting tool because:

Accepted Answer

A)  the yield curve usually is inverted so it reflects a growing economy. 
B)  the yield curve seldom is inverted and can signal an economic slowdown. 
C)  investors are expecting higher short-term rates in the future, and this usually signals an economic slowdown. 
D)  inverted yield curves signal better economic times are expected. 
A)  the yield curve usually is inverted so it reflects a growing economy. 
B)  the yield curve seldom is inverted and can signal an economic slowdown. 
C)  investors are expecting higher short-term rates in the future, and this usually signals an economic slowdown. 
D)  inverted yield curves signal better economic times are expected.

Question 2

The reason for the increase in inflation risk over time is due to the fact that:

Accepted Answer

A)  the inflation rate always increases over time. 
B)  we always have inflation. 
C)  it is more difficult to forecast inflation over longer periods of time. 
D)  investors are more focused on nominal returns than real returns. 
A)  the inflation rate always increases over time. 
B)  we always have inflation. 
C)  it is more difficult to forecast inflation over longer periods of time. 
D)  investors are more focused on nominal returns than real returns.

Question 3

We would expect the relationship between the risk spread on Baa bonds and U.S. Treasury securities of similar maturities to:

Accepted Answer

A)  vary directly with economic growth. 
B)  show no variation over the business cycle. 
C)  vary inversely with economic growth. 
D)  be uncorrelated with economic growth. 
A)  vary directly with economic growth. 
B)  show no variation over the business cycle. 
C)  vary inversely with economic growth. 
D)  be uncorrelated with economic growth.

Question 4

Under the expectations hypothesis, if expectations are for lower inflation in the future than what it currently is, the yield curve's slope will:

Accepted Answer

A)  become more upward sloping. 
B)  become flat. 
C)  be negative. 
D)  be vertical. 
A)  become more upward sloping. 
B)  become flat. 
C)  be negative. 
D)  be vertical.

Question 5

Suppose the economy has an inverted yield curve. According to the liquidity premium theory, which of the following interpretations could be used to explain this?

Accepted Answer

A)  Interest rates are expected to rise in the future. 
B)  Investors expect an economic slowdown. 
C)  Investors are indifferent between bonds with different time horizons. 
D)  The term spread has increased. 
A)  Interest rates are expected to rise in the future. 
B)  Investors expect an economic slowdown. 
C)  Investors are indifferent between bonds with different time horizons. 
D)  The term spread has increased.

Question 6

Municipal bonds are issued by:

Accepted Answer

A)  cities only. 
B)  the U.S. Treasury, but the proceeds can only be used by cities. 
C)  states and cities, but their interest is taxable only at the federal level. 
D)  states and cities and their interest is exempt from U.S. government taxation. 
A)  cities only. 
B)  the U.S. Treasury, but the proceeds can only be used by cities. 
C)  states and cities, but their interest is taxable only at the federal level. 
D)  states and cities and their interest is exempt from U.S. government taxation.

Question 7

Taxes play an important role in bond returns because:

Accepted Answer

A)  all interest from owning bonds is taxed. 
B)  all governments (federal, state, municipal) tax bonds similarly. 
C)  some bond interest is exempt from some government taxation, so after tax returns across bonds can vary considerably. 
D)  only U.S. Treasury bonds are tax-exempt, so investors should always seek higher returns from other bonds. 
A)  all interest from owning bonds is taxed. 
B)  all governments (federal, state, municipal) tax bonds similarly. 
C)  some bond interest is exempt from some government taxation, so after tax returns across bonds can vary considerably. 
D)  only U.S. Treasury bonds are tax-exempt, so investors should always seek higher returns from other bonds.

Question 8

Assume the expectations hypothesis regarding the term structure of interest rates is correct. Then, if the current two-year interest rate is 5% and the current one-year rate is 6%, then investors expect the future one-year rate to be:

Accepted Answer

A)  4%. 
B)  5%. 
C)  6%. 
D)  1%. 
A)  4%. 
B)  5%. 
C)  6%. 
D)  1%.

Question 9

The paper-bill spread refers to the interest rate spread between commercial paper and Treasury bills with the same maturity. Is this a risk spread or a term spread? How do you expect the paper-bill spread is related to GDP growth? What is the intuition for this result? What does this imply about the yield curve?

Accepted Answer

This is a risk spread because it compare

Question 10

Interest on most bonds issued by states is usually exempt from:

Accepted Answer

A)  state income tax but not federal. 
B)  from federal income tax but not state. 
C)  both state and federal income taxes. 
D)  from city income taxes. 
A)  state income tax but not federal. 
B)  from federal income tax but not state. 
C)  both state and federal income taxes. 
D)  from city income taxes.

An inverted yield curve is a valuable forecasting tool because:

The reason for the increase in inflation risk over time is due to the fact that:

We would expect the relationship between the risk spread on Baa bonds and U.S. Treasury securities of similar maturities to:

Under the expectations hypothesis, if expectations are for lower inflation in the future than what it currently is, the yield curve's slope will:

Suppose the economy has an inverted yield curve. According to the liquidity premium theory, which of the following interpretations could be used to explain this?

Municipal bonds are issued by:

Taxes play an important role in bond returns because:

Assume the expectations hypothesis regarding the term structure of interest rates is correct. Then, if the current two-year interest rate is 5% and the current one-year rate is 6%, then investors expect the future one-year rate to be:

Interest on most bonds issued by states is usually exempt from:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

Stocks, Stock Markets and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange Rate Policy and the Central Bank

Money Growth, Money Demand and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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Exam 7: The Risk and Term Structure of Interest Rates

An inverted yield curve is a valuable forecasting tool because:

The reason for the increase in inflation risk over time is due to the fact that:

We would expect the relationship between the risk spread on Baa bonds and U.S. Treasury securities of similar maturities to:

Under the expectations hypothesis, if expectations are for lower inflation in the future than what it currently is, the yield curve's slope will:

Suppose the economy has an inverted yield curve. According to the liquidity premium theory, which of the following interpretations could be used to explain this?

Municipal bonds are issued by:

Taxes play an important role in bond returns because:

Assume the expectations hypothesis regarding the term structure of interest rates is correct. Then, if the current two-year interest rate is 5% and the current one-year rate is 6%, then investors expect the future one-year rate to be:

Interest on most bonds issued by states is usually exempt from:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

Stocks, Stock Markets and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange Rate Policy and the Central Bank

Money Growth, Money Demand and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

Filters