Question 1

The segmented markets theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it.

Accepted Answer

A) True 
 B)False

Question 2

If liquidity influences the yield curve, the forward rate underestimates the market's expectation of the future interest rate.

Accepted Answer

A) True 
 B)False

Question 3

Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, thentheone-year forward rate is

Accepted Answer

A)  8.0 percent. 
B)  7.6 percent. 
C)  3.0 percent. 
D)  7.0 percent.

Question 4

The yield curve in a foreign country is

Accepted Answer

A)  always downward sloping. 
B)  nonexistent. 
C)  the same as the United States at any point in time. 
D)  none of the above

Question 5

The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate two years aheadis ____ percent.

Accepted Answer

A)  1.8 
B)  9 
C)  15 
D)  none of the above

Question 6

Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate accordingto the pure expectations theory?

Accepted Answer

A)  15.08 percent 
B)  3.00 percent 
C)  12.00 percent 
D)  12.62 percent 
E)  11.41 percent

Question 7

The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate one-year aheadis____ percent.

Accepted Answer

A)  2.8 
B)  115 
C)  103 
D)  15.1

Question 8

The yield curve for corporate bonds

Accepted Answer

A)  would typically lie below the Treasury yield curve. 
B)  identical to the Treasury yield curve. 
C)  typically has the same slope as the Treasury yield curve. 
D)  is irrelevant to investors.

Question 9

If issuers of securities (borrowers) and investors suddenly expect interest rates to decrease, their actions to benefit from their expectations should cause

Accepted Answer

A)  long-term yields to rise. 
B)  short-term yields to decrease. 
C)  prices of long-term securities to decrease. 
D)  A and B 
E)  none of the above

Question 10

If research showed that all investors attempt to purchase securities that perfectly match the time for which they will have available funds, this would specifically support the argument madebythe

Accepted Answer

A)  liquidity premium theory. 
B)  real interest rate theory. 
C)  expectations theory. 
D)  segmented markets theory.

Question 11

An investor's tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax yield of 11 percent?

Accepted Answer

A)  7.7 percent 
B)  15.71 percent 
C)  130 percent 
D)  11.00 percent 
E)  none of the above

Question 12

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ____ pressure on the demand for long-term fundsissued by borrowers and the yield curve will be ____ sloping.

Accepted Answer

A)  upward; downward 
B)  downward; upward 
C)  upward; upward 
D)  downward; downward

Question 13

According to the segmented markets theory, the term structure of interest rates is determined solely by expectations of future interest rates.

Accepted Answer

A) True 
 B)False

Question 14

A downward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.

Accepted Answer

A)  longer; lower 
B)  longer; higher 
C)  shorter; lower 
D)  shorter; higher 
E)  Answers A and D are correct.

Question 15

Some financial institutions such as commercial banks typically invest only in

Accepted Answer

A)  junk bonds 
B)  corporate bonds rated B or higher. 
C)  Treasury securities 
D)  investment-grade bonds.

Question 16

According to the liquidity premium theory, the expected yield on a two-year security will ____ the expected yield from consecutive investments in one-year securities.

Accepted Answer

A)  equal 
B)  be less than 
C)  be greater than 
D)  B and C are possible, depending on the size of the liquidity premium

Question 17

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ____ pressure on the demand for short-term fundsbyborrowers and the yield curve will be ____ sloping.

Accepted Answer

A)  upward; downward 
B)  downward; upward 
C)  upward; upward 
D)  downward; downward

Question 18

The yields of securities commonly move in the same direction over time.

Accepted Answer

A) True 
 B)False

Question 19

The theory of the term structure of interest rates, which states that investors and borrowers choose securities with maturities that satisfy their forecasted cash needs, is the

Accepted Answer

A)  pure expectations theory. 
B)  liquidity premium theory. 
C)  segmented markets theory. 
D)  liquidity habitat theory.

Question 20

All other characteristics being equal, securities with ____ liquidity would have to offer a ____ yield to be preferred.

Accepted Answer

A)  lower; higher 
B)  higher; higher 
C)  lower; lower 
D)  none of the above

Exam 3: Structure of Interest Rates

The segmented markets theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it.

If liquidity influences the yield curve, the forward rate underestimates the market's expectation of the future interest rate.

Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, thentheone-year forward rate is

The yield curve in a foreign country is

The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate two years aheadis ____ percent.

Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate accordingto the pure expectations theory?

The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate one-year aheadis____ percent.

The yield curve for corporate bonds

If issuers of securities (borrowers) and investors suddenly expect interest rates to decrease, their actions to benefit from their expectations should cause

If research showed that all investors attempt to purchase securities that perfectly match the time for which they will have available funds, this would specifically support the argument madebythe

An investor's tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax yield of 11 percent?

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place pressure on the demand for long-term fundsissued by borrowers and the yield curve will be sloping.

According to the segmented markets theory, the term structure of interest rates is determined solely by expectations of future interest rates.

A downward-sloping yield curve indicates that Treasury securities with maturities offer annualized yields.

Some financial institutions such as commercial banks typically invest only in

According to the liquidity premium theory, the expected yield on a two-year security will ____ the expected yield from consecutive investments in one-year securities.

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place pressure on the demand for short-term fundsbyborrowers and the yield curve will be sloping.

The yields of securities commonly move in the same direction over time.

The theory of the term structure of interest rates, which states that investors and borrowers choose securities with maturities that satisfy their forecasted cash needs, is the

All other characteristics being equal, securities with liquidity would have to offer a yield to be preferred.