Question 1

The market segmentation theory recognizes that investors have preferred habitats, which are dictated by:

Accepted Answer

A)  Saving flows. 
B)  Investment flows. 
C)  Cash flows. 
D)  a and b only. 
E)  All of the above. 
A)  Saving flows. 
B)  Investment flows. 
C)  Cash flows. 
D)  a and b only. 
E)  All of the above. D

Question 2

Using spot rates, the theoretical value of a bond is calculated:

Accepted Answer

A)  As the present value of all expected future cash flows. 
B)  By discounting a cash flow for a given period by the corresponding spot rate for that period. 
C)  By discounting all future cash flows at the riskfree rate. 
D)  By compounding all expected future cash flows. 
E)  None of the above. 
A)  As the present value of all expected future cash flows. 
B)  By discounting a cash flow for a given period by the corresponding spot rate for that period. 
C)  By discounting all future cash flows at the riskfree rate. 
D)  By compounding all expected future cash flows. 
E)  None of the above. B

Question 3

According to the liquidity theory of the term structure, the forward rate should reflect both interest rate expectations and:

Accepted Answer

A)  A liquidity premium. 
B)  A risk premium. 
C)  A maturity premium. 
D)  A marketability premium. 
E)  None of the above. 
A)  A liquidity premium. 
B)  A risk premium. 
C)  A maturity premium. 
D)  A marketability premium. 
E)  None of the above. A

Question 4

When the yield declines as maturity increases, the yield curve is said to be:

Accepted Answer

A)  Inverted. 
B)  Downward sloping. 
C)  Positive. 
D)  Negative. 
E)  a, b, and d only. 
A)  Inverted. 
B)  Downward sloping. 
C)  Positive. 
D)  Negative. 
E)  a, b, and d only.

Question 5

The pure expectations theory postulates that no systematic factors other than expected future short-term rates affect forward rates.

Accepted Answer

A) True 
 B)False

Question 6

The basic principle underlying the bootstrapping technique is that the value of the Treasury coupon security should be equal to the value of the package of zero-coupon Treasury securities that duplicates the coupon bond's cash flow.

Accepted Answer

A) True 
 B)False

Question 7

The theory which adopts the view that the term structure reflects the future path of interest rates as well as a risk premium is the:

Accepted Answer

A)  The liquidity theory. 
B)  The pure expectations theory. 
C)  The preferred habitat theory. 
D)  The market segmentation theory. 
E)  None of the above. 
A)  The liquidity theory. 
B)  The pure expectations theory. 
C)  The preferred habitat theory. 
D)  The market segmentation theory. 
E)  None of the above.

Question 8

The relationship between yield and maturity is referred to as:

Accepted Answer

A)  Yield curve. 
B)  Term structure of interest rates. 
C)  Term to maturity. 
D)  Yield spread. 
E)  None of the above. 
A)  Yield curve. 
B)  Term structure of interest rates. 
C)  Term to maturity. 
D)  Yield spread. 
E)  None of the above.

Question 9

The risks that cause uncertainty about the return over some investment horizon are:

Accepted Answer

A)  The uncertainty about the price of a bond at the end of the investment horizon. 
B)  The uncertainty about the rate at which the proceeds from a bond that matures prior to the maturity date can be reinvested until the maturity date. 
C)  The uncertainty about the movement of equity prices relative to debt instruments. 
D)  a and b only. 
E)  All of the above. 
A)  The uncertainty about the price of a bond at the end of the investment horizon. 
B)  The uncertainty about the rate at which the proceeds from a bond that matures prior to the maturity date can be reinvested until the maturity date. 
C)  The uncertainty about the movement of equity prices relative to debt instruments. 
D)  a and b only. 
E)  All of the above.

Question 10

Treasury securities are free of:

Accepted Answer

A)  Price risk. 
B)  Default risk. 
C)  Reinvestment risk. 
D)  Yield variations. 
E)  None of the above. 
A)  Price risk. 
B)  Default risk. 
C)  Reinvestment risk. 
D)  Yield variations. 
E)  None of the above.

Question 11

The yield of bonds of the same credit quality does not depend on their maturity alone.

Accepted Answer

A) True 
 B)False

Question 12

When the yield rises steadily as the maturity increases, the yield curve is said to be:

Accepted Answer

A)  Positive. 
B)  Upward sloping. 
C)  Normal. 
D)  All of the above. 
E)  None of the above. 
A)  Positive. 
B)  Upward sloping. 
C)  Normal. 
D)  All of the above. 
E)  None of the above.

Question 13

Differentiate between price risk and reinvestment risk.

Accepted Answer

a. Changes in interest rates affecting t

Question 14

If an investor has a six-month investment horizon, buying a 5-year, 10-year, or 20-year bond will produce the same six-month return. This interpretation of the pure expectations theory is referred to as the:

Accepted Answer

A)  Return-to-maturity expectation. 
B)  Local expectations. 
C)  Broadest interpretation. 
D)  Liquidity theory. 
E)  None of the above. 
A)  Return-to-maturity expectation. 
B)  Local expectations. 
C)  Broadest interpretation. 
D)  Liquidity theory. 
E)  None of the above.

Question 15

The graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities is known as:

Accepted Answer

A)  The yield curve. 
B)  The term to maturity. 
C)  The term structure of interest rates. 
D)  The yield spread. 
E)  None of the above. 
A)  The yield curve. 
B)  The term to maturity. 
C)  The term structure of interest rates. 
D)  The yield spread. 
E)  None of the above.

Question 16

A future interest rate calculated from either the spot rates or the yield curve is called:

Accepted Answer

A)  An implicit forward rate. 
B)  A forward rate. 
C)  A theoretical future rate. 
D)  a and b only. 
E)  All of the above. 
A)  An implicit forward rate. 
B)  A forward rate. 
C)  A theoretical future rate. 
D)  a and b only. 
E)  All of the above.

Question 17

Market participants tend to construct yield curves from observations of prices and yields in the:

Accepted Answer

A)  Bond market. 
B)  Treasury market. 
C)  Agency securities market. 
D)  Money market. 
E)  None of the above. 
A)  Bond market. 
B)  Treasury market. 
C)  Agency securities market. 
D)  Money market. 
E)  None of the above.

Question 18

Forward rates exclusively represent the expected future rates according to the:

Accepted Answer

A)  Market segmentation theory. 
B)  Pure expectations theory. 
C)  The liquidity theory. 
D)  The preferred habitat theory. 
E)  None of the above. 
A)  Market segmentation theory. 
B)  Pure expectations theory. 
C)  The liquidity theory. 
D)  The preferred habitat theory. 
E)  None of the above.

Question 19

As the largest and most active bond market, the Treasury market offers the fewest problems of illiquidity.

Accepted Answer

A) True 
 B)False

Question 20

The current Treasury yield curve can be used to extrapolate the:

Accepted Answer

A)  Theoretical spot rates. 
B)  The market's consensus of future interest rates. 
C)  Discount rate. 
D)  a and b only. 
E)  All of the above. 
A)  Theoretical spot rates. 
B)  The market's consensus of future interest rates. 
C)  Discount rate. 
D)  a and b only. 
E)  All of the above.

Exam 19: The Term Structure of Interest Rates

The market segmentation theory recognizes that investors have preferred habitats, which are dictated by:

Using spot rates, the theoretical value of a bond is calculated:

According to the liquidity theory of the term structure, the forward rate should reflect both interest rate expectations and:

When the yield declines as maturity increases, the yield curve is said to be:

The pure expectations theory postulates that no systematic factors other than expected future short-term rates affect forward rates.

The basic principle underlying the bootstrapping technique is that the value of the Treasury coupon security should be equal to the value of the package of zero-coupon Treasury securities that duplicates the coupon bond's cash flow.

The theory which adopts the view that the term structure reflects the future path of interest rates as well as a risk premium is the:

The relationship between yield and maturity is referred to as:

The risks that cause uncertainty about the return over some investment horizon are:

Treasury securities are free of:

The yield of bonds of the same credit quality does not depend on their maturity alone.

When the yield rises steadily as the maturity increases, the yield curve is said to be:

Differentiate between price risk and reinvestment risk.

If an investor has a six-month investment horizon, buying a 5-year, 10-year, or 20-year bond will produce the same six-month return. This interpretation of the pure expectations theory is referred to as the:

The graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities is known as:

A future interest rate calculated from either the spot rates or the yield curve is called:

Market participants tend to construct yield curves from observations of prices and yields in the:

Forward rates exclusively represent the expected future rates according to the:

As the largest and most active bond market, the Treasury market offers the fewest problems of illiquidity.

The current Treasury yield curve can be used to extrapolate the:

Introduction

Overview of Market Participants and Financial Innovation

Depository Institutions

Insurance Companies

Asset Management Firms

Investment Banking Firms

Primary and Secondary Markets

Risk and Return Theories: I

Risk and Return Theories: II

Introduction to Financial Futures Markets

Introduction to Options Markets

Introduction to the Swaps, Caps, and Floors Markets

Common Stock Market: I

Common Stock Market: II

Stock Options Market

The Market for Stock Index Products and Other Equity Derivatives

The Theory and Structure of Interest Rates

Valuation of Debt Contracts and Their Price Volatility Characteristics

Money Markets

Treasury and Agency Securities Markets

Corporate Senior Instruments Markets: I

Corporate Senior Instruments Markets: II

Municipal Securities Markets

The Residential Mortgage Market

The Market for Residential Mortgage-Backed Securities

Market for Asset-Backed Securities

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

International Bond Markets

International Bond Markets

Market for Interest Rate Risk Transfer Vehicles: OTC Instruments

The Market for Foreign Exchange and Risk Control Instruments

Filters