Deck 15: The Term Structure of Interest Rates

Question 1

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

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.

Answer 1

A

Question 2

Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the yield to maturity of a 3-year zero-coupon bond?

A)7.03%
B)9.00%
C)6.99%
D)7.49%

Answer 2

C

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

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.

Answer 3

D

Question 4

Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the price of a 2-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000)

A)$1,092
B)$1,054
C)$1,000
D)$1,073

Question 5

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. According to the expectations theory, what is the expected forward rate in the third year?

A)7.00%
B)7.33%
C)9.00%
D)11.19%

Question 6

Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the price of a 3-year zero-coupon bond with a par value of $1,000?

A)$863.83
B)$816.58
C)$772.18
D)$765.55

Question 7

Suppose that all investors expect that interest rates for the 4 years will be as follows: 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)

A)5%
B)7%
C)9%
D)10%

Question 8

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. What is the yield to maturity on a 3-year zero-coupon bond?

A)6.37%
B)9.00%
C)7.33%
D)10.00%

Question 9

Treasury STRIPS are

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 10

The yield curve shows at any point in time

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.

Question 11

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

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 12

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

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

Question 13

An inverted yield curve implies that

A)long-term interest rates are lower than short-term interest rates.
B)long-term interest rates are higher than short-term interest rates.
C)long-term interest rates are the same as short-term interest rates.
D)intermediate-term interest rates are higher than either short- or long-term interest rates.

Question 14

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

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

Question 15

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

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.

Question 16

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

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.

Question 17

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

A)normal
B)humped
C)inverted
D)flat

Question 18

Structure of interest rates is

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.

Question 19

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

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

The value of a Treasury bond should

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 21

An upward-sloping yield curve

A)may be an indication that interest rates are expected to increase.
B)may incorporate a liquidity premium.
C)may reflect the confounding of the liquidity premium with interest rate expectations.
D)All of the options are correct.

Question 22

Suppose that all investors expect that interest rates for the 4 years will be as follows: 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.)

A)5%
B)3%
C)9%
D)10%

Question 23

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

A)the forward rate.
B)the short rate.
C)the yield to maturity.
D)the discount rate.

Question 24

The yield curve is a component of

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

Question 25

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.

Question 26

Given the bond described above, if interest were paid semi-annually (rather than annually), and the bond continued to be priced at $850, the resulting effective annual yield to maturity would be

A)less than 12%.
B)more than 12%.
C)12%.
D)Cannot be determined.

Question 27

Forward rates ____________ future short rates because ____________.

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

Question 28

The on the run yield curve is

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 29

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

A)$1,092.97
B)$1,054.24
C)$1,028.51
D)$1,073.34

Question 30

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

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

Question 31

Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the price of 3-year zero-coupon bond with a par value of $1,000?

A)$889.08
B)$816.58
C)$772.18
D)$765.55

Question 32

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?

A)8.4%
B)8.6%
C)8.1%
D)8.9%

Question 33

The most recently issued Treasury securities are called

A)on the run.
B)off the run.
C)on the market.
D)off the market.

Question 34

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

A)5.80%
B)7.30%
C)6.65%
D)7.25%

Question 35

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.

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

Question 36

Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the yield to maturity of a 3-year zero-coupon bond?

A)7.00%
B)9.00%
C)6.99%
D)4.00%

Question 37

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

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

Question 38

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

A)$742.09
B)$1,222.09
C)$1,000.00
D)$1,141.92

Question 39

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

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.

Question 40

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?

A)$877.54
B)$888.33
C)$883.32
D)$893.36

Question 41

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?

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

Question 42

What should the purchase price of a 2-year zero-coupon bond be if it is purchased today and has face value of $1,000?

A)$966.87
B)$911.37
C)$950.21
D)$956.02

Question 43

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

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

Question 44

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?

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

Question 45

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

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

Question 46

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

A)5.75%
B)6.30%
C)5.65%
D)5.25%

Question 47

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. 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?

A)$995.63
B)$1,108.88
C)$1,000.00
D)$1,042.78

Question 48

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

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

Question 49

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?

A)7.2%
B)8.6%
C)8.5%
D)6.9%

Question 50

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.

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

Question 51

Given the bond described above, if interest were paid semi-annually (rather than annually) and the bond continued to be priced at $917.99, the resulting effective annual yield to maturity would be

A)less than 10%.
B)more than 10%.
C)10%.
D)Cannot be determined.

Question 52

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. According to the expectations theory, what is the expected forward rate in the third year?

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

Question 53

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. What is the yield to maturity on a 3-year zero-coupon bond?

A)6.37%
B)9.00%
C)7.33%
D)8.24%

Question 54

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?

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

Question 55

What is the yield to maturity of a 3-year bond?

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

Question 56

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

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

Question 57

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

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

Question 58

What should the purchase price of a 5-year zero-coupon bond be if it is purchased today and has face value of $1,000?

A)$776.14
B)$721.15
C)$779.54
D)$756.02