Exam 11: The Term Structure of Interest Rates

The preferred habitat theory asserts that, to the extent that the demand and supply of funds in a given maturity range does not match, some lenders and borrowers will be induced to shift to maturities showing the opposite imbalances.

Describe the three generic shapes that have appeared for the U.S. Treasury yield curve with some frequency over time.

It is important to remember that the basic principle underlying bootstrapping is that the value of the Treasury coupon security should be equal to the value of the package of ________ that duplicates the ________.

If we assume an initially flat term structure followed by economic news that subsequently leads market participants to expect interest rates to rise, which of the below statements is FALSE if the pure expectations theory holds?

Given the spot rates, the theoretical value of a bond can be calculated.

As quoted on a bond equivalent basis, what is the forward rate (f) for if the six-month spot rate is 3.50% and the one-year spot rate is 6.55%?

Explain through an example as to why borrowers (like investors) need to understand the mean of a forward rate.