Question 1

If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows) you could

Accepted Answer

A) profit by buying the stripped cash flows and reconstituting the bond. 
B) not profit by buying the stripped cash flows and reconstituting the bond. 
C) profit by buying the bond and creating STRIPS. 
D) not profit by buying the stripped cash flows and reconstituting the bond and profit by buying the bond and creating STRIPS. 
E) None of the options 
A) profit by buying the stripped cash flows and reconstituting the bond. 
B) not profit by buying the stripped cash flows and reconstituting the bond. 
C) profit by buying the bond and creating STRIPS. 
D) not profit by buying the stripped cash flows and reconstituting the bond and profit by buying the bond and creating STRIPS. 
E) None of the options

Question 2

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.

Question 3

Which of the following is not proposed as an explanation for the term structure of interest rates

Accepted Answer

A) The expectations theory 
B) The liquidity preference theory 
C) The safety of principal theory 
D) Modern portfolio theory 
E) The expectations theory and the liquidity preference theory 
A) The expectations theory 
B) The liquidity preference theory 
C) The safety of principal theory 
D) Modern portfolio theory 
E) The expectations theory and the liquidity preference theory

Question 4

Suppose that all investors expect that interest rates for the 4 years will be as follows:   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) 5% 
B) 3% 
C) 9% 
D) 10% 
E) None of the options 
A) 5% 
B) 3% 
C) 9% 
D) 10% 
E) None of the options

Question 5

Given the yield on a 3-year zero-coupon bond is 7% and forward rates of 6% in year 1 and 6.5% in year 2, what must be the forward rate in year 3

Accepted Answer

A) 7.2% 
B) 8.6% 
C) 8.5% 
D) 6.9% 
A) 7.2% 
B) 8.6% 
C) 8.5% 
D) 6.9%

Question 6

Suppose that all investors expect that interest rates for the 4 years will be as follows:   What is the yield to maturity of a 3-year zero-coupon bond

Accepted Answer

A) 7.00% 
B) 9.00% 
C) 6.99% 
D) 4.00% 
E) None of the options 
A) 7.00% 
B) 9.00% 
C) 6.99% 
D) 4.00% 
E) None of the options

Question 7

Suppose that all investors expect that interest rates for the 4 years will be as follows:   What is the price of a 2-year maturity bond with a 10% coupon rate paid annually (Par value = $1,000)

Accepted Answer

A) $1,092 
B) $1,054 
C) $1,000 
D) $1,073 
E) None of the options 
A) $1,092 
B) $1,054 
C) $1,000 
D) $1,073 
E) None of the options

Question 8

Suppose that all investors expect that interest rates for the 4 years will be as follows:   What is the price of 3-year zero-coupon bond with a par value of $1,000

Accepted Answer

A) $863.83 
B) $816.58 
C) $772.18 
D) $765.55 
E) None of the options 
A) $863.83 
B) $816.58 
C) $772.18 
D) $765.55 
E) None of the options

Question 9

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 10

An upward sloping yield curve

Accepted Answer

A) may be an indication that interest rates are expected to increase. 
B) may incorporate a liquidity premium. 
C) may reflect the confounding of the liquidity premium with interest rate expectations. 
D) All of the options 
E) None of the options 
A) may be an indication that interest rates are expected to increase. 
B) may incorporate a liquidity premium. 
C) may reflect the confounding of the liquidity premium with interest rate expectations. 
D) All of the options 
E) None of the options

Question 11

Although the expectations of increases in future interest rates can result in an upward sloping yield curve; an upward sloping yield curve does not in and of itself imply the expectations of higher future interest rates.Explain.

Accepted Answer

The effects of possible liquidity premiu

Question 12

Suppose that all investors expect that interest rates for the 4 years will be as follows:   What is the yield to maturity of a 3-year zero-coupon bond

Accepted Answer

A) 7.03% 
B) 9.00% 
C) 6.99% 
D) 7.49% 
E) None of the options 
A) 7.03% 
B) 9.00% 
C) 6.99% 
D) 7.49% 
E) None of the options

Question 13

The following is a list of prices for zero-coupon bonds with different maturities and par value of $1,000.   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) 10.00% 
E) None of the options 
A) 6.37% 
B) 9.00% 
C) 7.33% 
D) 10.00% 
E) None of the options

Question 14

Treasury STRIPS are

Accepted Answer

A) securities issued by the Treasury with very long maturities. 
B) extremely risky securities. 
C) created by selling each coupon or principal payment from a whole Treasury bond as a separate cash flow. 
D) created by pooling mortgage payments made to the Treasury. 
A) securities issued by the Treasury with very long maturities. 
B) extremely risky securities. 
C) created by selling each coupon or principal payment from a whole Treasury bond as a separate cash flow. 
D) created by pooling mortgage payments made to the Treasury.

Question 15

Given the yield on a 3 year zero-coupon bond is 7.2% and forward rates of 6.1% in year 1 and 6.9% in year 2, what must be the forward rate in year 3

Accepted Answer

A) 8.4% 
B) 8.6% 
C) 8.1% 
D) 8.9% 
E) None of the options 
A) 8.4% 
B) 8.6% 
C) 8.1% 
D) 8.9% 
E) None of the options

Question 16

Forward rates ____________ future short rates because ____________.

Accepted Answer

A) are equal to; they are both extracted from yields to maturity 
B) are equal to; they are perfect forecasts 
C) differ from; they are imperfect forecasts 
D) differ from; forward rates are estimated from dealer quotes while future short rates are extracted from yields to maturity 
E) are equal to; although they are estimated from different sources they both are used by traders to make purchase decisions 
A) are equal to; they are both extracted from yields to maturity 
B) are equal to; they are perfect forecasts 
C) differ from; they are imperfect forecasts 
D) differ from; forward rates are estimated from dealer quotes while future short rates are extracted from yields to maturity 
E) are equal to; although they are estimated from different sources they both are used by traders to make purchase decisions

Question 17

The following is a list of prices for zero-coupon bonds with different maturities and par value of $1,000.   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 18

Answer the following questions that relate to bonds.
A 2-year zero-coupon bond is selling for $890.00.What is the yield to maturity of this bond
The price of a 1-year zero-coupon bond is $931.97.What is the yield to maturity of this bond
Calculate the forward rate for the second year.
How can you construct a synthetic one-year forward loan (you are agreeing now to loan in one year)
 State the strategy and show the corresponding cash flows.Assume that you can purchase and sell fractional portions of bonds.Show all calculations and discuss the meaning of the transactions.

Accepted Answer

Calculations are shown in the table belo

Question 19

The following is a list of prices for zero-coupon bonds with different maturities and par value of $1,000.   You have purchased a 4-year maturity bond with a 9% coupon rate paid annually.The bond has a par value of $1,000.What would the price of the bond be one year from now if the implied forward rates stay the same

Accepted Answer

A) $995.63 
B) $1,108.88 
C) $1,000.00 
D) $1,042.78 
A) $995.63 
B) $1,108.88 
C) $1,000.00 
D) $1,042.78

Question 20

The yield curve shows at any point in tim

Accepted Answer

A) the relationship between the yield on a bond and the duration of the bond. 
B) the relationship between the coupon rate on a bond and time to maturity of the bond. 
C) the relationship between yield on a bond and the time to maturity on the bond. 
D) All of the options 
E) None of the options 
A) the relationship between the yield on a bond and the duration of the bond. 
B) the relationship between the coupon rate on a bond and time to maturity of the bond. 
C) the relationship between yield on a bond and the time to maturity on the bond. 
D) All of the options 
E) None of the options

Exam 15: The Term Structure of Interest Rates

If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows) you could

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

Which of the following is not proposed as an explanation for the term structure of interest rates

Suppose that all investors expect that interest rates for the 4 years will be as follows: 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.)

Given the yield on a 3-year zero-coupon bond is 7% and forward rates of 6% in year 1 and 6.5% 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: What is the yield to maturity of a 3-year zero-coupon bond

Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the price of a 2-year maturity bond with a 10% coupon rate paid annually (Par value = $1,000)

Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the price of 3-year zero-coupon bond with a par value of $1,000

An inverted yield curve is one

An upward sloping yield curve

Although the expectations of increases in future interest rates can result in an upward sloping yield curve; an upward sloping yield curve does not in and of itself imply the expectations of higher future interest rates.Explain.

Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the yield to maturity of a 3-year zero-coupon bond

The following is a list of prices for zero-coupon bonds with different maturities and par value of $1,000. What is the yield to maturity on a 3-year zero-coupon bond

Treasury STRIPS are

Given the yield on a 3 year zero-coupon bond is 7.2% and forward rates of 6.1% in year 1 and 6.9% in year 2, what must be the forward rate in year 3

Forward rates ____________ future short rates because ____________.

The following is a list of prices for zero-coupon bonds with different maturities and par value of $1,000. What is the yield to maturity on a 3-year zero-coupon bond

The yield curve shows at any point in tim

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