Question 1

What would the yield to maturity be on a four-year zero coupon bond purchased today?

Accepted Answer

A) 5.75% 
B) 6.30% 
C) 5.65% 
D) 5.25% 
E) none of the above. 
A) 5.75% 
B) 6.30% 
C) 5.65% 
D) 5.25% 
E) none of the above. A

Question 2

The term structure of interest rates is:

Accepted Answer

A) The relationship between the rates of interest on all securities. 
B) The relationship between the interest rate on a security and its time to maturity. 
C) The relationship between the yield on a bond and its default rate. 
D) All of the above. 
E) None of the above. 
A) The relationship between the rates of interest on all securities. 
B) The relationship between the interest rate on a security and its time to maturity. 
C) The relationship between the yield on a bond and its default rate. 
D) All of the above. 
E) None of the above. B

Question 3

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) B and C 
E) none of the above 
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) B and C 
E) none of the above D

Question 4

Discuss the theories of the term structure of interest rates.Include in your discussion the differences in the theories,and the advantages/disadvantages of each.

Accepted Answer

The expectations hypothesis is the most

Question 5

Which of the following combinations will result in a sharply increasing yield curve?

Accepted Answer

A) Increasing future expected short rates and increasing liquidity premiums 
B) Decreasing future expected short rates and increasing liquidity premiums 
C) Increasing future expected short rates and decreasing liquidity premiums 
D) Increasing future expected short rates and constant liquidity premiums 
E) Constant future expected short rates and increasing liquidity premiums 
A) Increasing future expected short rates and increasing liquidity premiums 
B) Decreasing future expected short rates and increasing liquidity premiums 
C) Increasing future expected short rates and decreasing liquidity premiums 
D) Increasing future expected short rates and constant liquidity premiums 
E) Constant future expected short rates and increasing liquidity premiums

Question 6

The pure yield curve can be estimated

Accepted Answer

A) by using zero-coupon Treasuries. 
B) by using stripped Treasuries if each coupon is treated as a separate "zero." 
C) by using corporate bonds with different risk ratings. 
D) by estimating liquidity premiums for different maturities. 
E) A and B 
A) by using zero-coupon Treasuries. 
B) by using stripped Treasuries if each coupon is treated as a separate "zero." 
C) by using corporate bonds with different risk ratings. 
D) by estimating liquidity premiums for different maturities. 
E) A and B

Question 7

$$\begin{array} { l | l } 
\underline { Y e a r } & \underline { 1 - Y e a r } \text { Forward Rate } \
\hline 1 & 5 \% \
\hline 2 & 5.5 \% \
\hline 3 & 6.0 \% \
\hline 4 & 6.5 \% \
\hline 5 & 7.0 \% \
\hline
\end{array}$$
-What should the purchase price of a 2-year zero coupon bond be if it is purchased at the beginning of year 2 and has face value of $1,000?

Accepted Answer

A) $877.54 
B) $888.33 
C) $883.32 
D) $894.21 
E) $871.80 
A) $877.54 
B) $888.33 
C) $883.32 
D) $894.21 
E) $871.80

Question 8

The yield curve
$$\begin{array} { l | l } 
\hline \text { Year } & \text { 1-Year Forward Rate } \
\hline 1 & 5.8 \% \
\hline 2 & 6.4 \% \
\hline 3 & 7.1 \% \
\hline 4 & 7.3 \% \
\hline 5 & 7.4 \% \
\hline
\end{array}$$

Accepted Answer

A) is a graphical depiction of term structure of interest rates. 
B) is usually depicted for U.S.Treasuries in order to hold risk constant across maturities and yields. 
C) is usually depicted for corporate bonds of different ratings. 
D) A and B. 
E) A and C. 
A) is a graphical depiction of term structure of interest rates. 
B) is usually depicted for U.S.Treasuries in order to hold risk constant across maturities and yields. 
C) is usually depicted for corporate bonds of different ratings. 
D) A and B. 
E) A and C.

Question 9

The "break-even" interest rate for year n that equates the return on an n-period zero-coupon bond to that of an n-1-period zero-coupon bond rolled over into a one-year bond in year n is defined as

Accepted Answer

A) the forward rate. 
B) the short rate. 
C) the yield to maturity. 
D) the discount rate. 
E) None of the above. 
A) the forward rate. 
B) the short rate. 
C) the yield to maturity. 
D) the discount rate. 
E) None of the above.

Question 10

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 
E) none of the above 
A) $995.63 
B) $1,108.88 
C) $1,000.00 
D) $1,042.78 
E) none of the above

Question 11

The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000. $$\begin{array} { | l | l | } 
\hline \text { Maturity (Years) } & \underline { \text { Price } } \
\hline 1 & \$ 943.40 \
\hline 2 & \$ 881.68 \
\hline 3 & \$ 808.88 \
\hline 4 & \$ 742.09 \
\hline
\end{array}$$
-What is,according to the expectations theory,the expected forward rate in the third year?

Accepted Answer

A) 7.00% 
B) 7.33% 
C) 9.00% 
D) 11.19% 
E) none of the above 
A) 7.00% 
B) 7.33% 
C) 9.00% 
D) 11.19% 
E) none of the above

Question 12

What is the yield to maturity of a 4-year bond?

Accepted Answer

A) 4.69% 
B) 4.95% 
C) 5.02% 
D) 5.05% 
E) 5.08% 
A) 4.69% 
B) 4.95% 
C) 5.02% 
D) 5.05% 
E) 5.08%

Question 13

The value of a Treasury bond should

Accepted Answer

A) be equal to the sum of the value of STRIPS created from it. 
B) be less than the sum of the value of STRIPS created from it. 
C) be greater than the sum of the value of STRIPS created from it. 
D) A or B 
E) B or C 
A) be equal to the sum of the value of STRIPS created from it. 
B) be less than the sum of the value of STRIPS created from it. 
C) be greater than the sum of the value of STRIPS created from it. 
D) A or B 
E) B or C

Question 14

Suppose that all investors expect that interest rates for the 4 years will be as follows: $$\begin{array} { l | l | } 
\hline \text { Year } & \text { Forward Interest Rate } \
\hline 0 & \text { (today) } 5 \% \
\hline 1 & 7 \% \
\hline 2 & 9 \% \
\hline 3 & 10 \% \
\hline
\end{array}$$
-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 above 
A) $1,092 
B) $1,054 
C) $1,000 
D) $1,073 
E) none of the above

Question 15

The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000. $$\begin{array} { | l | l | } 
\hline \text { Maturity (Years) } & \underline { \text { Price } } \
\hline 1 & \$ 943.40 \
\hline 2 & \$ 881.68 \
\hline 3 & \$ 808.88 \
\hline 4 & \$ 742.09 \
\hline
\end{array}$$
-What is the price of a 4-year maturity bond with a 12% coupon rate paid annually? (Par value = $1,000)

Accepted Answer

A) $742.09 
B) $1,222.09 
C) $1,000.00 
D) $1,141.92 
E) none of the above 
A) $742.09 
B) $1,222.09 
C) $1,000.00 
D) $1,141.92 
E) none of the above

Question 16

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% 
E) none of the above. 
A) 7.2% 
B) 8.6% 
C) 8.5% 
D) 6.9% 
E) none of the above.

Question 17

Explain what the following terms mean: spot rate,short rate,and forward rate.Which of these is (are)observable today?

Accepted Answer

The n-period spot rate is the yield to m

Question 18

$$\begin{array} { l | l } 
\hline \text { Year } & \text { 1-Year Forward Rate } \
\hline 1 & 4.6 \% \
\hline 2 & 4.9 \% \
\hline 3 & 5.2 \% \
\hline 4 & 5.5 \% \
\hline 5 & 5.8 \% \
\hline
\end{array}$$
-What should the purchase price of a 4-year zero coupon bond be if it is purchased today and has face value of $1,000?

Accepted Answer

A) $887.42 
B) $821.15 
C) $879.54 
D) $856.02 
E) $866.32 
A) $887.42 
B) $821.15 
C) $879.54 
D) $856.02 
E) $866.32

Question 19

Suppose that all investors expect that interest rates for the 4 years will be as follows: $$\begin{array} { l | l | } 
\hline \text { Year } & \text { Forward Interest Rate } \
\hline 0 & \text { (today) } 5 \% \
\hline 1 & 7 \% \
\hline 2 & 9 \% \
\hline 3 & 10 \% \
\hline
\end{array}$$
-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 above 
A) $863.83 
B) $816.58 
C) $772.18 
D) $765.55 
E) none of the above

Question 20

When computing yield to maturity,the implicit reinvestment assumption is that the interest payments are reinvested at the:

Accepted Answer

A) Coupon rate. 
B) Current yield. 
C) Yield to maturity at the time of the investment. 
D) Prevailing yield to maturity at the time interest payments are received. 
E) The average yield to maturity throughout the investment period. 
A) Coupon rate. 
B) Current yield. 
C) Yield to maturity at the time of the investment. 
D) Prevailing yield to maturity at the time interest payments are received. 
E) The average yield to maturity throughout the investment period.

Exam 15: The Term Structure of Interest Rates

What would the yield to maturity be on a four-year zero coupon bond purchased today?

The term structure of interest rates is:

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

Discuss the theories of the term structure of interest rates.Include in your discussion the differences in the theories,and the advantages/disadvantages of each.

Which of the following combinations will result in a sharply increasing yield curve?

The pure yield curve can be estimated

Forward Rate 1 5\% 2 5.5\% 3 6.0\% 4 6.5\% 5 7.0\% -What should the purchase price of a 2-year zero coupon bond be if it is purchased at the beginning of year 2 and has face value of $1,000?

The yield curve Year 1-Year Forward Rate 1 5.8\% 2 6.4\% 3 7.1\% 4 7.3\% 5 7.4\%

The "break-even" interest rate for year n that equates the return on an n-period zero-coupon bond to that of an n-1-period zero-coupon bond rolled over into a one-year bond in year n is defined as

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?

The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000. Maturity (Years) 1 \ 943.40 2 \ 881.68 3 \ 808.88 4 \ 742.09 -What is,according to the expectations theory,the expected forward rate in the third year?

What is the yield to maturity of a 4-year bond?

The value of a Treasury bond should

Suppose that all investors expect that interest rates for the 4 years will be as follows: Year Forward Interest Rate 0 (today) 5\% 1 7\% 2 9\% 3 10\% -What is the price of a 2-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000)

The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000. Maturity (Years) 1 \ 943.40 2 \ 881.68 3 \ 808.88 4 \ 742.09 -What is the price of a 4-year maturity bond with a 12% coupon rate paid annually? (Par value = $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?

Explain what the following terms mean: spot rate,short rate,and forward rate.Which of these is (are)observable today?

Year 1-Year Forward Rate 1 4.6\% 2 4.9\% 3 5.2\% 4 5.5\% 5 5.8\% -What should the purchase price of a 4-year zero coupon bond be if it is purchased today and has face value of $1,000?

Suppose that all investors expect that interest rates for the 4 years will be as follows: Year Forward Interest Rate 0 (today) 5\% 1 7\% 2 9\% 3 10\% -What is the price of 3-year zero coupon bond with a par value of $1,000?

When computing yield to maturity,the implicit reinvestment assumption is that the interest payments are reinvested at the:

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Introduction to Risk,return,and the Historical Record

Risk Aversion and Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

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Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

Managing Bond Portfolios

Options Markets: Introduction

Option Valuation

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Futures, swaps, and Risk Management

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Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

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Investment Policy and the Framework of the CFA Institute Appendices

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