Question 1

A yield curve where market participants expect lower future rates of interest is:

Accepted Answer

A)  downward-sloping. 
B)  upward-sloping. 
C)  flat. 
D)  linear. 
A)  downward-sloping. 
B)  upward-sloping. 
C)  flat. 
D)  linear.

Question 2

According to the loanable funds approach,the supply of loanable funds is derived from the government sector and the business sector.

Accepted Answer

A) True 
 B)False

Question 3

The liquidity premium theory of the term structure proposes:

Accepted Answer

A)  it is the relative supply and demand of securities in the various maturity ranges that determines yields. 
B)  investors have a preference for short-term bonds, as they have greater liquidity. 
C)  longer-term bonds have less default risk. 
D)  longer-term bonds are less volatile in price. 
A)  it is the relative supply and demand of securities in the various maturity ranges that determines yields. 
B)  investors have a preference for short-term bonds, as they have greater liquidity. 
C)  longer-term bonds have less default risk. 
D)  longer-term bonds are less volatile in price.

Question 4

The term structure of interest rates describes how interest rates move over time.

Accepted Answer

A) True 
 B)False

Question 5

All else being equal,the supply curve for loanable funds may shift to the left (decrease)as a result of:

Accepted Answer

A)  government borrowing. 
B)  expectations of an increase in inflation. 
C)  businesses borrowing to finance profitable investments. 
D)  an increase in corporate taxes. 
A)  government borrowing. 
B)  expectations of an increase in inflation. 
C)  businesses borrowing to finance profitable investments. 
D)  an increase in corporate taxes.

Question 6

In relation to the risk structure of interest rates:

Accepted Answer

A)  the yield on a BBB rated bonds is higher than an AA-rated bond. 
B)  the risk premium of borrowers may vary over time. 
C)  the government bonds are assumed to be the benchmark rate. 
D)  all of the given answers are correct. 
A)  the yield on a BBB rated bonds is higher than an AA-rated bond. 
B)  the risk premium of borrowers may vary over time. 
C)  the government bonds are assumed to be the benchmark rate. 
D)  all of the given answers are correct.

Question 7

The _______ show the term structure of interest rates as a graph.

Accepted Answer

A)  risk-return curves 
B)  yield curves 
C)  supply and demand curves 
D)  total demand curves 
A)  risk-return curves 
B)  yield curves 
C)  supply and demand curves 
D)  total demand curves

Question 8

For debt instruments,if interest rates increase:

Accepted Answer

A)  prices of long-term bonds will increase more than short-term bonds. 
B)  prices of short-term bonds will increase more than long-term bonds. 
C)  the coupons of long-term bonds will increase more than short-term bonds. 
D)  coupons of long-term bonds will increase more than short-term bonds. 
A)  prices of long-term bonds will increase more than short-term bonds. 
B)  prices of short-term bonds will increase more than long-term bonds. 
C)  the coupons of long-term bonds will increase more than short-term bonds. 
D)  coupons of long-term bonds will increase more than short-term bonds.

Question 9

If a central bank increases interest rates,then gradually:

Accepted Answer

A)  the country's gross domestic product is likely to increase. 
B)  foreign exchange rate is likely to come under downward pressure. 
C)  demand for imported goods and services is likely to decrease. 
D)  flows of investment funds into the country are likely to decrease. 
A)  the country's gross domestic product is likely to increase. 
B)  foreign exchange rate is likely to come under downward pressure. 
C)  demand for imported goods and services is likely to decrease. 
D)  flows of investment funds into the country are likely to decrease.

Question 10

A lower level of income in all sectors of the economy causes the demand for funds to _______ and the interest rate to _____.

Accepted Answer

A)  increase; rise 
B)  decrease; fall 
C)  increase; fall 
D)  decrease; rise 
A)  increase; rise 
B)  decrease; fall 
C)  increase; fall 
D)  decrease; rise

Question 11

All else being equal,if a central bank buys government bonds from the market it would:

Accepted Answer

A)  increase the money supply. 
B)  increase interest rates. 
C)  mean savings in the economy are likely to increase. 
D)  mean the supply of loanable funds would move to the left. 
A)  increase the money supply. 
B)  increase interest rates. 
C)  mean savings in the economy are likely to increase. 
D)  mean the supply of loanable funds would move to the left.

Question 12

Which of the following would cause the quantity of loanable funds supplied to increase?

Accepted Answer

A)  A decrease in inflationary pressures 
B)  An increase in inflationary pressures 
C)  An increase in interest rates 
D)  A decline in interest rates 
A)  A decrease in inflationary pressures 
B)  An increase in inflationary pressures 
C)  An increase in interest rates 
D)  A decline in interest rates

Question 13

Using the expectations theory of term structure,a positively sloped yield curve indicates that investors expect:

Accepted Answer

A)  falling long-term interest rates. 
B)  rising long-term interest rates. 
C)  short-term interest rates to be lower in the near future. 
D)  short-term interest rates to be higher in the near future. 
A)  falling long-term interest rates. 
B)  rising long-term interest rates. 
C)  short-term interest rates to be lower in the near future. 
D)  short-term interest rates to be higher in the near future.

Question 14

When a yield curve has a negative slope:

Accepted Answer

A)  long-term yields are higher than short-term yields. 
B)  short-term yields are higher than long-term yields. 
C)  the money market is expecting default by issuers of bank bills. 
D)  the inflation rate is expected to rise. 
A)  long-term yields are higher than short-term yields. 
B)  short-term yields are higher than long-term yields. 
C)  the money market is expecting default by issuers of bank bills. 
D)  the inflation rate is expected to rise.

Question 15

Which of the following is NOT a hypothesis or theory used to explain the general shape of the yield curve?

Accepted Answer

A)  Expectations hypothesis 
B)  Liquidity premium hypothesis 
C)  Market segmentation theory 
D)  Capital markets theory 
A)  Expectations hypothesis 
B)  Liquidity premium hypothesis 
C)  Market segmentation theory 
D)  Capital markets theory

Question 16

If credit growth and associated debt levels are growing too quickly,a central bank will generally:

Accepted Answer

A)  decease interest rates. 
B)  use open market operations and sell government securities. 
C)  increase interest rates. 
D)  loosen monetary policy. 
A)  decease interest rates. 
B)  use open market operations and sell government securities. 
C)  increase interest rates. 
D)  loosen monetary policy.

Question 17

Discuss when a central bank will generally increase interest rates.

Accepted Answer

After forming economic variables such as

Question 18

According to the liquidity premium theory of term structure,a mildly upward-sloping yield curve suggests the market is predicting constant short-term interest rates.

Accepted Answer

A) True 
 B)False

Question 19

Using the pure expectations approach to the determination of interest rates,what is the shape of the yield curve indicated in the following data?
(0i1)9.47% per annum
(1i1)8.45% per annum
(0i2)8.96% per annum

Accepted Answer

A)  Humped yield curve 
B)  Inverse yield curve 
C)  Normal yield curve 
D)  Variable yield curve 
A)  Humped yield curve 
B)  Inverse yield curve 
C)  Normal yield curve 
D)  Variable yield curve

Question 20

The assumption that prices for short-term and long-term securities are determined in the different maturity ranges is the basis for the _____ approach to explaining the term structure.

Accepted Answer

A)  liquidity premium 
B)  expectations 
C)  segmented markets 
D)  yield curve 
A)  liquidity premium 
B)  expectations 
C)  segmented markets 
D)  yield curve

Exam 13: An Introduction to Interest Rate Determination and Forecasting

A yield curve where market participants expect lower future rates of interest is:

According to the loanable funds approach,the supply of loanable funds is derived from the government sector and the business sector.

The liquidity premium theory of the term structure proposes:

The term structure of interest rates describes how interest rates move over time.

All else being equal,the supply curve for loanable funds may shift to the left (decrease)as a result of:

In relation to the risk structure of interest rates:

The _______ show the term structure of interest rates as a graph.

For debt instruments,if interest rates increase:

If a central bank increases interest rates,then gradually:

A lower level of income in all sectors of the economy causes the demand for funds to _______ and the interest rate to _____.

All else being equal,if a central bank buys government bonds from the market it would:

Which of the following would cause the quantity of loanable funds supplied to increase?

Using the expectations theory of term structure,a positively sloped yield curve indicates that investors expect:

When a yield curve has a negative slope:

Which of the following is NOT a hypothesis or theory used to explain the general shape of the yield curve?

If credit growth and associated debt levels are growing too quickly,a central bank will generally:

Discuss when a central bank will generally increase interest rates.

According to the liquidity premium theory of term structure,a mildly upward-sloping yield curve suggests the market is predicting constant short-term interest rates.

Using the pure expectations approach to the determination of interest rates,what is the shape of the yield curve indicated in the following data? (0i1)9.47% per annum (1i1)8.45% per annum (0i2)8.96% per annum

The assumption that prices for short-term and long-term securities are determined in the different maturity ranges is the basis for the _____ approach to explaining the term structure.

A Modern Financial System: An Overview

Commercial Banks

Non-Bank Financial Institutions

The Share Market and the Corporation

Corporations Issuing Equity in the Share Market

Investors in the Share Market

Forecasting Share Price Movements

Mathematics of Finance: An Introduction to Basic Concepts and Calculations

Short-Term Debt

Medium-To-Long-Term Debt

International Debt Markets

Government Debt, monetary Policy and the Payments System

Interest Rate Risk

Foreign Exchange: The Structure and Operation of the Fx Market

Foreign Exchange: Factors That Influence the Exchange Rate

Foreign Exchange: Risk Identification and Management

An Introduction to Risk Management and Derivatives

Future Contracts and Forward Rate Agreements

Options

Interest Rate Swaps, Cross-Currency Swaps and Credit Default

Filters

A lower level of income in all sectors of the economy causes the demand for funds to ___ and the interest rate to _.

Using the pure expectations approach to the determination of interest rates,what is the shape of the yield curve indicated in the following data? (₀i₁)9.47% per annum (₁i₁)8.45% per annum (₀i₂)8.96% per annum