Question 1

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 A

Question 2

The yield curve
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.is a graphical depiction of term structure of interest rates and is usually depicted for U.S. Treasuries in order to hold risk constant across maturities and yields.
E. is a graphical depiction of term structure of interest rates and is usually depicted for corporate bonds of different ratings.

Accepted Answer

D A C B
Explanation: The yield curve (yields vs. maturities, all else equal) is depicted for U.S. Treasuries more frequently than for corporate bonds, as the risk is constant across maturities for Treasuries.

Question 3

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)  None of the options are correct. 
A)  arbitrage would probably occur. 
B)  arbitrage would probably not occur. 
C)  the FED would adjust interest rates. 
D)  None of the options are correct. A

Question 4

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? $\begin{array}{lr}
&\text { 1-Year } \
&\text { Forward }\
\text { Year } & \text { Rate } \
1 & 4.6 \% \
2 & 4.9 \% \
3 & 5.2 \% \
4 & 5.5 \% \
5 & 6.8 \%
\end{array}$

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 5

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $\begin{array}{cc}
\text { Maturity }\
\text { (Years) } & \text { Price } \
1 & \$ 925.15 \
2 & 862.57 \
3 & 788.66 \
4 & 711.00
\end{array}$ What is the price of a 4-year maturity bond with a 10% coupon rate paid annually? (Par values = $1,000.)

Accepted Answer

A)  $742.09 
B)  $1,222.09 
C)  $1,035.66 
D)  $1,141.84 
A)  $742.09 
B)  $1,222.09 
C)  $1,035.66 
D)  $1,141.84

Question 6

The expectations theory of the term structure of interest rates states that

Accepted Answer

A)  forward rates are determined by investors'expectations of future interest rates. 
B)  forward rates exceed the expected future interest rates. 
C)  yields on long- and short-maturity bonds are determined by the supply and demand for the securities. 
D)  All of the options are correct. 
E)  None of the options are correct. 
A)  forward rates are determined by investors'expectations of future interest rates. 
B)  forward rates exceed the expected future interest rates. 
C)  yields on long- and short-maturity bonds are determined by the supply and demand for the securities. 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 7

What is the yield to maturity of a 4-year bond? $\begin{array}{lr}
&\text { 1-Year } \
&\text { Forward }\
\text { Year } & \text { Rate } \
1 & 4.6 \% \
2 & 4.9 \% \
3 & 5.2 \% \
4 & 5.5 \% \
5 & 6.8 \%
\end{array}$

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 8

What is the yield to maturity of a 1-year bond? $\begin{array}{lr}
&\text { 1-Year } \
&\text { Forward }\
\text { Year } & \text { Rate } \
1 & 4.6 \% \
2 & 4.9 \% \
3 & 5.2 \% \
4 & 5.5 \% \
5 & 6.8 \%
\end{array}$

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

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 10

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $\begin{array}{cc}
\text { Maturity }\
\text { (Years) } & \text { Price } \
1 & \$ 943.40 \
2 & 881.68 \
3 & 808.88 \
4 & 742.09
\end{array}$ 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 are correct. 
A)  6.37% 
B)  9.00% 
C)  7.33% 
D)  10.00% 
E)  None of the options are correct.

Question 11

What should the purchase price of a 3-year zero-coupon bond be if it is purchased today and has face value of $1,000? $\begin{array}{lr}
&\text { 1-Year } \
&\text { Forward }\
\text { Year } & \text { Rate } \
1 & 4.6 \% \
2 & 4.9 \% \
3 & 5.2 \% \
4 & 5.5 \% \
5 & 6.8 \%
\end{array}$

Accepted Answer

A)  $887.42 
B)  $871.12 
C)  $879.54 
D)  $856.02 
E)  $866.32 
A)  $887.42 
B)  $871.12 
C)  $879.54 
D)  $856.02 
E)  $866.32

Question 12

______ can occur if _____.

Accepted Answer

A)  Arbitrage; the law of one price is not violated 
B)  Arbitrage; the law of one price is violated 
C)  Low-risk economic profit; the law of one price is not violated 
D)  Low-risk economic profit; the law of one price is violated 
E)  Arbitrage and low-risk economic profit; the law of one price is violated 
A)  Arbitrage; the law of one price is not violated 
B)  Arbitrage; the law of one price is violated 
C)  Low-risk economic profit; the law of one price is not violated 
D)  Low-risk economic profit; the law of one price is violated 
E)  Arbitrage and low-risk economic profit; the law of one price is violated

Question 13

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 options are correct. 
E)  None of the options are correct. 
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 are correct. 
E)  None of the options are correct.

Question 14

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. 
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.

Question 15

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $\begin{array}{cc}
\text { Maturity }\
\text { (Years) } & \text { Price } \
1 & \$ 943.40 \
2 & 881.68 \
3 & 808.88 \
4 & 742.09
\end{array}$ According to the expectations theory, what is 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 options are correct. 
A)  7.00% 
B)  7.33% 
C)  9.00% 
D)  11.19% 
E)  None of the options are correct.

Question 16

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 17

According to the expectations theory, what is the expected forward rate in the third year? The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $\begin{array}{cc}
\text { Maturity }\
\text { (Years) } & \text { Price } \
1 & \$ 925.15 \
2 & 862.57 \
3 & 788.66 \
4 & 711.00
\end{array}$

Accepted Answer

A)  7.23% 
B)  9.37% 
C)  9.00% 
D)  10.9% 
A)  7.23% 
B)  9.37% 
C)  9.00% 
D)  10.9%

Question 18

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? $\begin{array}{lr}
&\text { 1-Year } \
&\text { Forward }\
\text { Year } & \text { Rate } \
1 & 5 \% \
2 & 5.5 \% \
3 & 6.0 \% \
4 & 6.5 \% \
5 & 7.0 \%
\end{array}$

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 19

If the value of a Treasury bond was lower 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)  None of the options are correct. 
A)  arbitrage would probably occur. 
B)  arbitrage would probably not occur. 
C)  the FED would adjust interest rates. 
D)  None of the options are correct.

Question 20

Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lr}
& \text { Forward } \
\text { Year } & \text { Interest Rate } \
\hline 0 & \text { (today) } 6 \% \
1 & 7 \% \
2 & 9 \% \
3 & 10 \%
\end{array}$ 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 options are correct. 
A)  $1,092 
B)  $1,054 
C)  $1,000 
D)  $1,073 
E)  None of the options are correct.

Exam 15: The Term Structure of Interest Rates

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

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

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? 1-Year Forward Year Rate 1 4.6\% 2 4.9\% 3 5.2\% 4 5.5\% 5 6.8\%

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. Maturity (Years) Price 1 \ 925.15 2 862.57 3 788.66 4 711.00 What is the price of a 4-year maturity bond with a 10% coupon rate paid annually? (Par values = $1,000.)

The expectations theory of the term structure of interest rates states that

What is the yield to maturity of a 4-year bond? 1-Year Forward Year Rate 1 4.6\% 2 4.9\% 3 5.2\% 4 5.5\% 5 6.8\%

What is the yield to maturity of a 1-year bond? 1-Year Forward Year Rate 1 4.6\% 2 4.9\% 3 5.2\% 4 5.5\% 5 6.8\%

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?

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. Maturity (Years) Price 1 \ 943.40 2 881.68 3 808.88 4 742.09 What is the yield to maturity on a 3-year zero-coupon bond?

What should the purchase price of a 3-year zero-coupon bond be if it is purchased today and has face value of $1,000? 1-Year Forward Year Rate 1 4.6\% 2 4.9\% 3 5.2\% 4 5.5\% 5 6.8\%

______ can occur if _____.

The yield curve shows at any point in time

The on the run yield curve is

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

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

According to the expectations theory, what is the expected forward rate in the third year? The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. Maturity (Years) Price 1 \ 925.15 2 862.57 3 788.66 4 711.00

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? 1-Year Forward Year Rate 1 5\% 2 5.5\% 3 6.0\% 4 6.5\% 5 7.0\%

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

Suppose that all investors expect that interest rates for the 4 years will be as follows: Forward Year Interest Rate 0 (today) 6\% 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 Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

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

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

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