Question 1

A flight to quality refers to a move by investors:

Accepted Answer

A) away from bonds towards stocks. 
B) towards securities of other countries and away from U.S.Treasuries. 
C) towards precious metals and away from U.S.Treasury bonds. 
D) away from low-quality bonds towards high-quality bonds.

Question 2

Under the Expectations Hypothesis of the term structure of interest rates, explain the impact of a U.S.Treasury decision to phase out the 30-year bond and to only focus on 3-month, 1-year, 5-year and 10-year bonds.

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The answer of Under the Expectations Hypothesis of the term...

Question 3

Under the expectations hypothesis, if expectations are for lower inflation in the future than what it currently is, the yield curve's slope will:

Accepted Answer

A) become more upward sloping. 
B) become flat. 
C) be negative. 
D) be vertical.

Question 4

Why do yield curves usually slope upward?

Accepted Answer

The answer of Why do yield curves usually slope upward?...

Question 5

Explain why an inverted yield curve is a valuable forecasting tool.

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The answer of Explain why an inverted yield curve is...

Question 6

If an investor wants to compare commercial paper to a corresponding default-free investment, which security would he/she use and why?

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The answer of If an investor wants to compare commercial...

Question 7

Assume an investor has a choice of 3 consecutive one-year bonds or one 3-year bond.Assuming the Expectations Hypothesis of the term structure of interest rates is correct the:

Accepted Answer

A) average interest rate of the three consecutive one-year bonds should be less than the 3-year bond to reflect the risk premium. 
B) interest rate of the 3-year bond should equal the average interest rate of the 3 one-year bonds. 
C) three consecutive one-year bonds must have the same interest rate. 
D) current one-year interest rate must equal the current 3-year interest rate.

Question 8

The risk premium that investors associate with a bond increases with all of the following except:

Accepted Answer

A) maturity. 
B) inflation risk increases. 
C) interest-rate risk. 
D) an improved bond rating.

Question 9

The default-risk premium:

Accepted Answer

A) should vary directly with the bond's yield and inversely with its price. 
B) is less than 0 (zero) for a U.S.Treasury bond. 
C) should be lower for a highly speculative bond than for an investment-grade bond. 
D) should vary directly with the bond's yield and the bond's price.

Question 10

The yield curve for U.S.Treasury securities allows us to draw the following conclusions, except that:

Accepted Answer

A) long-term yields tend to higher than short term yields. 
B) interest rates of different maturities tend to move. 
C) long-term rates tend to equal short-term rates. 
D) yields on short-term securities are more volatile than yields on long-term bonds.

Question 11

Briefly describe the two different types of junk bonds (high-yield bonds).

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The answer of Briefly describe the two different types of...

Question 12

If a bond's rating improves it should cause the bond's price:

Accepted Answer

A) and yield to increase, all other factors constant. 
B) and yield to decrease, all other factors constant. 
C) to increase and its yield to decrease, all other factors constant. 
D) to decrease and its yield to increase, all other factors constant.

Question 13

The term structure of interest rates:

Accepted Answer

A) always results in an upward sloping yield curve. 
B) represents the variation in yields for securities differing in maturities. 
C) usually results in a flat yield curve. 
D) usually results in a downward sloping yield curve.

Question 14

Why might we expect to see a high correlation between increases in the risk structure of interest rates and the yield curve becoming inverted?

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The answer of Why might we expect to see a...

Question 15

The Expectations Hypothesis cannot explain why:

Accepted Answer

A) yields on securities of different maturities move together. 
B) short-term yields are more volatile than long term yields. 
C) yield curves usually slope upward. 
D) long-term bonds usually are less liquid than short-term bonds with the same default risk.

Question 16

Taxes play an important role in bond returns because:

Accepted Answer

A) all interest from owning bonds is taxed. 
B) all governments (federal, state, municipal) tax bonds similarly. 
C) some bond interest is exempt from some government taxation, so after tax returns across bonds can vary considerably. 
D) only U.S.Treasury bonds are tax-exempt, so investors should always seek higher returns from other bonds.

Question 17

The reason for the increase in inflation risk over time is due to the fact that:

Accepted Answer

A) the inflation rate always increases over time. 
B) we always have inflation. 
C) it is more difficult to forecast inflation over longer periods of time. 
D) investors are more focused on nominal returns than real returns.

Question 18

Suppose that interest rates are expected to remain unchanged over the next few years.However, there is a risk premium for longer-term bonds.According to the liquidity premium theory, the yield curve should be:

Accepted Answer

A) upward sloping and very steep. 
B) upward sloping and relatively flat. 
C) inverted. 
D) vertical.

Question 19

Under the Expectations Hypothesis, a downward-sloping yield curve suggests:

Accepted Answer

A) investors expect future short-term interest rates to fall. 
B) investors expect future short-term interest rates to rise. 
C) this is a trick question, the yield curve always slopes upward. 
D) investors expect future short-term interest rates to remain constant.

Question 20

During economic slowdowns why would you expect the risk premium to increase the most between U.S.Treasury bonds and junk bonds?

Accepted Answer

The answer of During economic slowdowns why would you expect...

Exam 7: The Risk and Term Structure of Interest Rates