Question 1

$\text { 38. Which of the following statements is true? }$

Accepted Answer

A) The prices of debt securities fall during recessions. 
B) Interest rates on neither the short-term securities nor the long-term securities fall in recession. 
C) Interest rates on long-term securities fall more than the interest rates on short-term securities in recession. 
D) Interest rates on short-term securities fall more than the interest rates on long-term securities in recession. 
A) The prices of debt securities fall during recessions. 
B) Interest rates on neither the short-term securities nor the long-term securities fall in recession. 
C) Interest rates on long-term securities fall more than the interest rates on short-term securities in recession. 
D) Interest rates on short-term securities fall more than the interest rates on long-term securities in recession.

Question 2

Which of the following is a possible outcome of a negative or low term spread?

Accepted Answer

A) A low of negative spread may indicate higher short-term interest rates in the future. 
B) A low or negative spread may cause the yield curve to slope upward. 
C) A low or negative spread may reduce lending by banks. 
D) A low or negative spread may indicate the early stages of economic expansions. 
A) A low of negative spread may indicate higher short-term interest rates in the future. 
B) A low or negative spread may cause the yield curve to slope upward. 
C) A low or negative spread may reduce lending by banks. 
D) A low or negative spread may indicate the early stages of economic expansions.

Question 3

What does an upward-sloping yield curve imply, according to the expectations theory of the term structure of interest rates?

Accepted Answer

A) Investors expect long-term interest rates to fall in the future. 
B) Investors expect future short-term interest rates to be lower than the current short-term interest rate. 
C) Investors expect future short-term interest rates to be the same as the current short-term interest rate. 
D) Investors expect future short-term interest rates to be higher than the current short-term interest rate. 
A) Investors expect long-term interest rates to fall in the future. 
B) Investors expect future short-term interest rates to be lower than the current short-term interest rate. 
C) Investors expect future short-term interest rates to be the same as the current short-term interest rate. 
D) Investors expect future short-term interest rates to be higher than the current short-term interest rate.

Question 4

The interest that an investor will earn, on maturity, if she purchases a two year bond by paying 6.6 percent today is

Accepted Answer

A) 1.1025. 
B) 1.1363. 
C) 1.0036. 
D) 1.0003. 
A) 1.1025. 
B) 1.1363. 
C) 1.0036. 
D) 1.0003.

Question 5

Which of the following statements is true?

Accepted Answer

A) During recessions, there is an increase in the demand for debt securities. 
B) During recessions, there is an increase in the supply of debt securities. 
C) During recessions, the supply-curve of debt securities shift comparatively more, to the left, than the demand- curve for securities. 
D) During recessions, the demand-curve for debt securities shift comparatively more, to the left, than the supply- curve of securities. 
A) During recessions, there is an increase in the demand for debt securities. 
B) During recessions, there is an increase in the supply of debt securities. 
C) During recessions, the supply-curve of debt securities shift comparatively more, to the left, than the demand- curve for securities. 
D) During recessions, the demand-curve for debt securities shift comparatively more, to the left, than the supply- curve of securities.

Question 6

What does a downward-sloping yield curve imply, according to the expectations theory of the term structure of interest rates?

Accepted Answer

A) Investors expect long-term interest rates to rise in the future. 
B) Investors expect future short-term interest rates to be lower than the current short-term interest rate. 
C) Investors expect future short-term interest rates to be the same as the current short-term interest rate. 
D) Investors expect future short-term interest rates to be higher than the current short-term interest rate. 
A) Investors expect long-term interest rates to rise in the future. 
B) Investors expect future short-term interest rates to be lower than the current short-term interest rate. 
C) Investors expect future short-term interest rates to be the same as the current short-term interest rate. 
D) Investors expect future short-term interest rates to be higher than the current short-term interest rate.

Question 7

Explain how an economist could use the slope of the yield curve to analyze the probability that a recession will occur.
Explain why the spread may matter.

Accepted Answer

The smaller the term spread (the more in

Question 8

Suppose that a risk-neutral investor has a choice between buying a one-year bond paying 5 percent today, a two- year bond paying 5.4 percent today, a three-year bond paying 5.8 percent today, or a four-year bond paying 6.2 percent today, if a one-year bond purchased one year from now is expected to have an interest rate of 6 percent, a one-year bond purchased two years from now is expected to have an interest rate of 7 percent, and a one-year bond purchased three years from now is expected to have an interest rate of 8 percent.Explain with the help of suitable calculations, which of the following would the investor decide to do?
a.The investor will purchase a one-year bond today, followed by three successive one-year bonds.
b.The investor will purchase a two-year bond today, followed by two successive one-year bonds.
c.The investor will purchase a three-year bond today, followed by a one-year bond.
d.The investor will purchase a four-year bond today.

Accepted Answer

One-year bond today, followed by three s

Question 9

Consider the bond market to be in equilibrium according to our complete theory of the term structure of interest rates.You observe the following interest rates available today on bonds with differing times to maturity.(You may ignore transactions costs.)
$$\begin{array} { l l } 
\text { Time to maturity } & \text { Yield to maturity } \
\text { 1 year } & 5.0 \% \
\text { 2 years } & 7.0 \% \
\text { 3 years } & 7.5 \%
\end{array}$$

The term premium for the two-year bond is the extra yield to maturity paid on a two-year bond compared with buying two separate one-year bonds (one today and another after one year).You believe that the term premium on the two-year bond is 0.5 percent.
The term premium for the three-year bond is the extra yield to maturity paid on a three-year bond compared with buying three separate one-year bonds (one today, another after one year, and another after two years).You believe that the term premium on the three-year bond is 1.0 percent.
Given your beliefs about the term premiums on two-year and three-year bonds, calculate the interest rates on one- year bonds that you expect to prevail one year from now and two years from now.In other words, what do you expect to be the yield to maturity on a one-year bond one year from now and what do you expect to be the yield to maturity on a one-year bond two years from now? Explain and show all your work.

Accepted Answer

The term premium implies that
\[\begin{a

Question 10

When the federal tax rate on interest income is 20 percent, an investor will purchase______in order to maximize returns.

Accepted Answer

A) a local government bond with an interest rate of 7 percent 
B) a corporate bond with an interest rate of 8 percent 
C) a corporate bond with an interest rate of 8.5 percent 
D) a local government bond with an interest rate of 6.5 percent 
A) a local government bond with an interest rate of 7 percent 
B) a corporate bond with an interest rate of 8 percent 
C) a corporate bond with an interest rate of 8.5 percent 
D) a local government bond with an interest rate of 6.5 percent

Question 11

Assume that the bond market is in equilibrium.The current interest rate on one-year bonds is 5 percent, the interest rate on one-year bonds, one year from now is 6 percent, and in two years the interest rate on one-year bonds will be 6.5 percent.Assume that there is no term premium on a one-year bond.If the term premium equals 0.5 percent × the number of years to maturity, for two-year bonds and three-year bonds.The interest rate today on the two-year bond is and the interest rate today on a three-year bond is .

Accepted Answer

A) 5.5 percent; 5.8 percent 
B) 6.0 percent; 6.3 percent 
C) 6.2 percent; 6.8 percent 
D) 6.5 percent; 7.3 percent 
A) 5.5 percent; 5.8 percent 
B) 6.0 percent; 6.3 percent 
C) 6.2 percent; 6.8 percent 
D) 6.5 percent; 7.3 percent

Question 12

Which of the following is true of the analysis of the term structure of interest rates?​

Accepted Answer

A) ​It assumes that investors in long­term securities face high transaction costs. 
B) ​It assumes that investors can predict short­term interest rates accurately. 
C) ​It assumes that the yield curve is always flat. 
D) ​It assumes that investors in bonds have a preferred habitat. 
A) ​It assumes that investors in long­term securities face high transaction costs. 
B) ​It assumes that investors can predict short­term interest rates accurately. 
C) ​It assumes that the yield curve is always flat. 
D) ​It assumes that investors in bonds have a preferred habitat.

Question 13

The process of turning assets such as mortgages into bonds sold to investors is

Accepted Answer

A) default. 
B) standard deviation. 
C) standardization. 
D) securitization. 
A) default. 
B) standard deviation. 
C) standardization. 
D) securitization.

Question 14

If you observe that the current yield curve is upward sloping, it is likely that

Accepted Answer

A) an economic expansion has just begun. 
B) an economic expansion has been going on for several years. 
C) a recession is about to begin. 
D) a recession is nearly over. 
A) an economic expansion has just begun. 
B) an economic expansion has been going on for several years. 
C) a recession is about to begin. 
D) a recession is nearly over.

Question 15

Which of the following is likely to happen to short-term and long-term interest rates during recessions?

Accepted Answer

A) The short-term interest rates rise during recessions but the long-term interest rates fall during recessions. 
B) The short-term interest rates fall during recessions but the long-term interest rates rise during recessions. 
C) Both the short-term and the long-term interest rates fall during recessions. 
D) Both the short-term and the long-term interest rates rise during recessions. 
A) The short-term interest rates rise during recessions but the long-term interest rates fall during recessions. 
B) The short-term interest rates fall during recessions but the long-term interest rates rise during recessions. 
C) Both the short-term and the long-term interest rates fall during recessions. 
D) Both the short-term and the long-term interest rates rise during recessions.

Question 16

According to the expectations theory of the term structure of interest rates,

Accepted Answer

A) a short-term interest rate is equal to the average of current and expected future long-term interest rates. 
B) a short-term interest rate has no relation to long-term interest rates. 
C) a long-term interest rate is equal to the average of current and expected future short-term interest rates. 
D) the yield curve is always flat. 
A) a short-term interest rate is equal to the average of current and expected future long-term interest rates. 
B) a short-term interest rate has no relation to long-term interest rates. 
C) a long-term interest rate is equal to the average of current and expected future short-term interest rates. 
D) the yield curve is always flat.

Question 17

​Which of the following securities is likely to have the highest yield to maturity?

Accepted Answer

A) ​A corporate bond with a Baa rating 
B) ​A corporate bond with AAA rating 
C) ​A government bond exempted from federal income tax 
D) ​A certificate of deposit with a three months to maturity 
A) ​A corporate bond with a Baa rating 
B) ​A corporate bond with AAA rating 
C) ​A government bond exempted from federal income tax 
D) ​A certificate of deposit with a three months to maturity

Question 18

Which of the following is true of short­term interest rates?​

Accepted Answer

A) Short-term interest rates decline when long-term interest rates increase. 
B) ​Short­term interest rates are more volatile than long­term interest rates. 
C) ​Short­term interest rates are higher than long­term interest rates. 
D) ​Short­term interest rates are less volatile than long­term interest rates. 
A) Short-term interest rates decline when long-term interest rates increase. 
B) ​Short­term interest rates are more volatile than long­term interest rates. 
C) ​Short­term interest rates are higher than long­term interest rates. 
D) ​Short­term interest rates are less volatile than long­term interest rates.

Question 19

An inverted yield curve indicates that

Accepted Answer

A) an economic expansion has just begun. 
B) an economic expansion has been going on for several years. 
C) a recession is about to begin. 
D) a recession is nearly over. 
A) an economic expansion has just begun. 
B) an economic expansion has been going on for several years. 
C) a recession is about to begin. 
D) a recession is nearly over.

Question 20

What does a flat yield curve imply, according to the expectations theory of the term structure of interest rates?

Accepted Answer

A) The price level will not change in the future. 
B) Future long-term rates are expected to rise. 
C) Future long-term rates are expected to fall. 
D) Future short-term rates are not expected to change. 
A) The price level will not change in the future. 
B) Future long-term rates are expected to rise. 
C) Future long-term rates are expected to fall. 
D) Future short-term rates are not expected to change.

$\text { 38. Which of the following statements is true? }$

Which of the following is a possible outcome of a negative or low term spread?

What does an upward-sloping yield curve imply, according to the expectations theory of the term structure of interest rates?

The interest that an investor will earn, on maturity, if she purchases a two year bond by paying 6.6 percent today is

Which of the following statements is true?

What does a downward-sloping yield curve imply, according to the expectations theory of the term structure of interest rates?

Explain how an economist could use the slope of the yield curve to analyze the probability that a recession will occur. Explain why the spread may matter.

When the federal tax rate on interest income is 20 percent, an investor will purchase______in order to maximize returns.

Which of the following is true of the analysis of the term structure of interest rates?

The process of turning assets such as mortgages into bonds sold to investors is

If you observe that the current yield curve is upward sloping, it is likely that

Which of the following is likely to happen to short-term and long-term interest rates during recessions?

According to the expectations theory of the term structure of interest rates,

Which of the following securities is likely to have the highest yield to maturity?

Which of the following is true of shortterm interest rates?

An inverted yield curve indicates that

What does a flat yield curve imply, according to the expectations theory of the term structure of interest rates?

Money and the Financial System

The Financial System and the Economy

Money and Payments

Present Value

Real Interest Rates

Stocks and Other Assets

How Banks Work

Governments Role in Banking

Economics Growth and Business Cycles

Modeling Money

The Aggregate-Demandaggregate-Supply Model

Modern Macroeconomic Models

Economic Interdependence

The Federal Reserve System

Monetary Control

Monetary Policy: Goals and Tradeoffs

Rules for Monetary Policy

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Exam 5: The Structure of Interest Rates

38. Which of the following statements is true? \text { 38. Which of the following statements is true? } 38. Which of the following statements is true?

Which of the following is a possible outcome of a negative or low term spread?

What does an upward-sloping yield curve imply, according to the expectations theory of the term structure of interest rates?

The interest that an investor will earn, on maturity, if she purchases a two year bond by paying 6.6 percent today is

Which of the following statements is true?

What does a downward-sloping yield curve imply, according to the expectations theory of the term structure of interest rates?

Explain how an economist could use the slope of the yield curve to analyze the probability that a recession will occur. Explain why the spread may matter.

When the federal tax rate on interest income is 20 percent, an investor will purchase______in order to maximize returns.

Which of the following is true of the analysis of the term structure of interest rates?​

The process of turning assets such as mortgages into bonds sold to investors is

If you observe that the current yield curve is upward sloping, it is likely that

Which of the following is likely to happen to short-term and long-term interest rates during recessions?

According to the expectations theory of the term structure of interest rates,

​Which of the following securities is likely to have the highest yield to maturity?

Which of the following is true of short­term interest rates?​

An inverted yield curve indicates that

What does a flat yield curve imply, according to the expectations theory of the term structure of interest rates?

Money and the Financial System

The Financial System and the Economy

Money and Payments

Present Value

Real Interest Rates

Stocks and Other Assets

How Banks Work

Governments Role in Banking

Economics Growth and Business Cycles

Modeling Money

The Aggregate-Demandaggregate-Supply Model

Modern Macroeconomic Models

Economic Interdependence

The Federal Reserve System

Monetary Control

Monetary Policy: Goals and Tradeoffs

Rules for Monetary Policy

Filters

$\text { 38. Which of the following statements is true? }$

Which of the following is true of the analysis of the term structure of interest rates?

Which of the following securities is likely to have the highest yield to maturity?

Which of the following is true of shortterm interest rates?