Question 1

The yield curve shows at any point in time:

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 above. 
E) None of the above. 
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 above. 
E) None of the above.

Question 2

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

Accepted Answer

A) $966.37 
B) $912.87 
C) $950.21 
D) $956.02 
E) $945.51 
A) $966.37 
B) $912.87 
C) $950.21 
D) $956.02 
E) $945.51

Question 3

What is the yield to maturity of a 1-year bond?

Accepted Answer

A) 4.6% 
B) 4.9% 
C) 5.2% 
D) 5.5% 
E) 5.8% 
A) 4.6% 
B) 4.9% 
C) 5.2% 
D) 5.5% 
E) 5.8%

Question 4

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 5

What is the yield to maturity of a 2-year bond?

Accepted Answer

A) 4.6% 
B) 4.9% 
C) 5.2% 
D) 4.7% 
E) 5.8% 
A) 4.6% 
B) 4.9% 
C) 5.2% 
D) 4.7% 
E) 5.8%

Question 6

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

Accepted Answer

A) arbitrage would probably occur. 
B) arbitrage would probably not occur. 
C) the FED would adjust interest rates. 
D) B and C 
E) none of the above 
A) arbitrage would probably occur. 
B) arbitrage would probably not occur. 
C) the FED would adjust interest rates. 
D) B and C 
E) none of the above

Question 7

Term structure of interest rates is the relationship between what variables?What is assumed about other variables?How is term structure of interest rates depicted graphically?

Accepted Answer

Term structure of interest rates is the

Question 8

What is the yield to maturity of a 5-year bond?

Accepted Answer

A) 4.6% 
B) 4.9% 
C) 5.2% 
D) 5.5% 
E) 5.8% 
A) 4.6% 
B) 4.9% 
C) 5.2% 
D) 5.5% 
E) 5.8%

Question 9

Calculate the price at the beginning of year 1 of an 8% annual coupon bond with face value $1,000 and 5 years to maturity.

Accepted Answer

A) $1,105.47 
B) $1,131.91 
C) $1,084.25 
D) $1,150.01 
E) $719.75 
A) $1,105.47 
B) $1,131.91 
C) $1,084.25 
D) $1,150.01 
E) $719.75

Question 10

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

Accepted Answer

A) 5.80% 
B) 7.30% 
C) 6.65% 
D) 7.25% 
E) none of the above. 
A) 5.80% 
B) 7.30% 
C) 6.65% 
D) 7.25% 
E) none of the above.

Question 11

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 above. 
A) 8.4% 
B) 8.6% 
C) 8.1% 
D) 8.9% 
E) none of the above.

Question 12

The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000. $$\begin{array} { | l | l | } 
\hline \text { Maturity (Years) } & { \text { Price } } \
\hline 1 & \$ 925.16 \
\hline 2 & \$ 862.57 \
\hline 3 & \$ 788.66 \
\hline 4 & \$ 711.00 \
\hline
\end{array}$$
-What is,according to the expectations theory,the expected forward rate in the third year?

Accepted Answer

A) 7.23 
B) 9.37% 
C) 9.00% 
D) 10.9% 
E) none of the above 
A) 7.23 
B) 9.37% 
C) 9.00% 
D) 10.9% 
E) none of the above

Question 13

Suppose that all investors expect that interest rates for the 4 years will be as follows: $$\begin{array} { l | l | } 
\hline \text { Year } & \text { Forward Interest Rate } \
\hline 0 & \text { (today) } 3 \% \
\hline 1 & 4 \% \
\hline 2 & 5 \% \
\hline 3 & 6 \% \
\hline
\end{array}$$
-What is the price of 3-year zero coupon bond with a par value of $1,000?

Accepted Answer

A) $889.08 
B) $816.58 
C) $772.18 
D) $765.55 
E) none of the above 
A) $889.08 
B) $816.58 
C) $772.18 
D) $765.55 
E) none of the above

Question 14

Calculate the price at the beginning of year 1 of a 10% annual coupon bond with face value $1,000 and 5 years to maturity.

Accepted Answer

A) $1,105 
B) $1,132 
C) $1,179 
D) $1,150 
E) $1,119 
A) $1,105 
B) $1,132 
C) $1,179 
D) $1,150 
E) $1,119

Question 15

If the value of a Treasury bond was higher 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

Question 16

An upward sloping yield curve is a(n)_______ yield curve.

Accepted Answer

A) normal. 
B) humped. 
C) inverted. 
D) flat. 
E) none of the above. 
A) normal. 
B) humped. 
C) inverted. 
D) flat. 
E) none of the above.

Question 17

The on the run yield curve is

Accepted Answer

A) a plot of yield as a function of maturity for zero-coupon bonds. 
B) a plot of yield as a function of maturity for recently issued coupon bonds trading at or near par. 
C) a plot of yield as a function of maturity for corporate bonds with different risk ratings. 
D) a plot of liquidity premiums for different maturities. 
E) A and B. 
A) a plot of yield as a function of maturity for zero-coupon bonds. 
B) a plot of yield as a function of maturity for recently issued coupon bonds trading at or near par. 
C) a plot of yield as a function of maturity for corporate bonds with different risk ratings. 
D) a plot of liquidity premiums for different maturities. 
E) A and B.

Question 18

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 19

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. 
E) C and D 
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. 
E) C and D

Question 20

The yield curve is a component of

Accepted Answer

A) the Dow Jones Industrial Average. 
B) the consumer price index. 
C) the index of leading economic indicators. 
D) the producer price index. 
E) the inflation index. 
A) the Dow Jones Industrial Average. 
B) the consumer price index. 
C) the index of leading economic indicators. 
D) the producer price index. 
E) the inflation index.

Exam 15: The Term Structure of Interest Rates

The yield curve shows at any point in time:

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 1-year zero coupon bond be if it is purchased today and has face value of $1,000?

What is the yield to maturity of a 1-year bond?

Forward rates ____________ future short rates because ____________.

What is the yield to maturity of a 2-year bond?

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

Term structure of interest rates is the relationship between what variables?What is assumed about other variables?How is term structure of interest rates depicted graphically?

What is the yield to maturity of a 5-year bond?

Calculate the price at the beginning of year 1 of an 8% annual coupon bond with face value $1,000 and 5 years to maturity.

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

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?

The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000. Maturity (Years) Price 1 \ 925.16 2 \ 862.57 3 \ 788.66 4 \ 711.00 -What is,according to the expectations theory,the expected forward rate in the third year?

Suppose that all investors expect that interest rates for the 4 years will be as follows: Year Forward Interest Rate 0 (today) 3\% 1 4\% 2 5\% 3 6\% -What is the price of 3-year zero coupon bond with a par value of $1,000?

Calculate the price at the beginning of year 1 of a 10% annual coupon bond with face value $1,000 and 5 years to maturity.

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

An upward sloping yield curve is a(n)_______ yield curve.

The on the run yield curve is

An inverted yield curve is one

Treasury STRIPS are

The yield curve is a component of

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

The Capital Asset Pricing Model

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

Futures Markets

Futures, swaps, and Risk Management

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the CFA Institute Appendices

Filters

Forward rates future short rates because .