Question 1

Which of the following are possible explanations for the term structure of interest rates?

Accepted Answer

A)  The expectations theory 
B)  The liquidity preference theory 
C)  Modern portfolio theory 
D)  The expectations theory and the liquidity preference theory 
A)  The expectations theory 
B)  The liquidity preference theory 
C)  Modern portfolio theory 
D)  The expectations theory and the liquidity preference theory

Question 2

Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lr}
& \text { Forward } \
\text { Year } & \text { Interest Rate } \
\hline 0 & \text { (today) } 6 \% \
1 & 7 \% \
2 & 9 \% \
3 & 10 \%
\end{array}$ 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)  7% 
C)  9% 
D)  10% 
E)  None of the options are correct. 
A)  5% 
B)  7% 
C)  9% 
D)  10% 
E)  None of the options are correct.

Question 3

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 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

Accepted Answer

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

Question 5

Bond stripping and bond reconstitution offer opportunities for ______, which can occur if the _________ is violated.

Accepted Answer

A)  arbitrage; law of one price 
B)  arbitrage; restrictive covenants 
C)  huge losses; law of one price 
D)  huge losses; restrictive covenants 
A)  arbitrage; law of one price 
B)  arbitrage; restrictive covenants 
C)  huge losses; law of one price 
D)  huge losses; restrictive covenants

Question 6

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

Accepted Answer

A)  $1,092.97 
B)  $1,054.24 
C)  $1,028.51 
D)  $1,073.34 
E)  None of the options are correct. 
A)  $1,092.97 
B)  $1,054.24 
C)  $1,028.51 
D)  $1,073.34 
E)  None of the options are correct.

Question 7

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

Question 8

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $\begin{array}{cc}
\text { Maturity }\
\text { (Years) } & \text { Price } \
1 & \$ 925.15 \
2 & 862.57 \
3 & 788.66 \
4 & 711.00
\end{array}$ 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 9

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)  All of the options are correct. 
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)  All of the options are correct.

Question 10

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.

Question 11

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 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 options are correct. 
A)  $742.09 
B)  $1,222.09 
C)  $1,000.00 
D)  $1,141.92 
E)  None of the options are correct.

Question 12

The most recently issued Treasury securities are called
A. on the run.
B. off the run.
C. on the market.
D. off the market.
E. None of the options are correct.

Accepted Answer

A A
Explanation: The

Question 13

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

Accepted Answer

A)  $887.42 
B)  $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 14

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

Accepted Answer

A)  $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 15

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

Accepted Answer

A)  normal 
B)  humped 
C)  inverted 
D)  flat 
E)  None of the options are correct. 
A)  normal 
B)  humped 
C)  inverted 
D)  flat 
E)  None of the options are correct.

Question 16

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 are correct. 
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 are correct.

Question 17

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.) Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lr}
& \text { Forward } \
\text { Year } & \text { Interest Rate } \
\hline 0 & \text { (today) } 3 \% \
1 & 4 \% \
2 & 5 \% \
3 & 6 \%
\end{array}$

Accepted Answer

A)  5% 
B)  3% 
C)  9% 
D)  10% 
E)  None of the options are correct. 
A)  5% 
B)  3% 
C)  9% 
D)  10% 
E)  None of the options are correct.

Question 18

Investors can use publicly available financial data to determine which of the following? 
I. The shape of the yield curve
II. Expected future short-term rates (if liquidity premiums are ignored)
III. The direction the Dow indexes are heading
IV. The actions to be taken by the Federal Reserve

Accepted Answer

A)  I and II 
B)  I and III 
C)  I, II, and III 
D)  I, III, and IV 
E)  I, II, III, and IV 
A)  I and II 
B)  I and III 
C)  I, II, and III 
D)  I, III, and IV 
E)  I, II, III, and IV

Exam 15: The Term Structure of Interest Rates

Which of the following are possible explanations for the term structure of interest rates?

Treasury STRIPS are

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

Bond stripping and bond reconstitution offer opportunities for ______, which can occur if the _________ is violated.

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

Structure of interest rates is

The value of a Treasury bond should

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

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 price of a 4-year maturity bond with a 12% coupon rate paid annually? (Par value = $1,000.)

The most recently issued Treasury securities are called A. on the run. B. off the run. C. on the market. D. off the market. E. None of the options are correct.

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

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

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

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

Investors can use publicly available financial data to determine which of the following? I. The shape of the yield curve II. Expected future short-term rates (if liquidity premiums are ignored) III. The direction the Dow indexes are heading IV. The actions to be taken by the Federal Reserve

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

Filters

Bond stripping and bond reconstitution offer opportunities for , which can occur if the ___ is violated.