Question 1

The preferred habitat theory asserts that, to the extent that the demand and supply of funds in a given maturity range does not match, some lenders and borrowers will be induced to shift to maturities showing the opposite imbalances.

Accepted Answer

A) True 
 B)False

Question 2

Describe the three generic shapes that have appeared for the U.S. Treasury yield curve with some frequency over time.

Accepted Answer

The answer of Describe the three generic shapes that have...

Question 3

It is important to remember that the basic principle underlying bootstrapping is that the value of the Treasury coupon security should be equal to the value of the package of ________ that duplicates the ________.

Accepted Answer

A)  coupon paying T-Bills; coupon bond's cash flow 
B)  zero-coupon Treasury securities; coupon bond's cash flow 
C)  coupon paying T-Bills; discount bond's cash flow 
D)  zero-coupon Treasury securities; discount bond's cash flow

Question 4

If we assume an initially flat term structure followed by economic news that subsequently leads market participants to expect interest rates to rise, which of the below statements is FALSE if the pure expectations theory holds?

Accepted Answer

A)  Market participants interested in a long-term investment would not want to buy long-term bonds because they would expect the yield structure to rise sooner or later, resulting in a price decline for the bonds and a capital loss on the long-term bonds purchased. 
B)  Any response from borrower or lender would tend either to lower the net demand for, or to increase the supply of, long-maturity bonds, and two responses would increase demand for long-term debt obligations. 
C)  Speculators expecting rising rates would anticipate a decline in the price of long-term bonds and, therefore, would want to sell any long-term bonds they own and possibly to "short sell" some they do not now own. 
D)  Borrowers wishing to acquire long-term funds would be pulled toward borrowing now, in the long end of the market, by the expectation that borrowing at a later time would be more expensive.

Question 5

Given the spot rates, the theoretical value of a bond can be calculated.

Accepted Answer

A) True 
 B)False

Question 6

As quoted on a bond equivalent basis, what is the forward rate (f) for if the six-month spot rate is 3.50% and the one-year spot rate is 6.55%?

Accepted Answer

A)  9.65% 
B)  8.12% 
C)  6.28% 
D)  4.83%

Question 7

Explain through an example as to why borrowers (like investors) need to understand the mean of a forward rate.

Accepted Answer

The answer of Explain through an example as to why...

Exam 11: The Term Structure of Interest Rates