Question 1

Some types of debt securities always offer a higher yield than others.

Accepted Answer

A) True 
 B)False

Question 2

Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to

Accepted Answer

A) become inverted. 
B) become flat. 
C) become upward sloping. 
D) be unaffected.

Question 3

Which of the following is not a characteristic affecting the yields on debt securities?

Accepted Answer

A) default risk 
B) liquidity 
C) tax status 
D) term to maturity 
E) All of the above affect yields on debt securities.

Question 4

If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield curve should be

Accepted Answer

A) flat. 
B) downward sloping. 
C) upward sloping. 
D) none of the above.

Question 5

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 funds by borrowers and the yield curve will be ____ sloping.

Accepted Answer

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

Question 6

If interest rates are expected to decrease, the yield on new short-term securities may be expected to ____, and the yield curve should be ____ sloping.

Accepted Answer

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

Question 7

If liquidity influences the yield curve, but is not considered when deriving the forward interest rate, the forward interest rate ____ the market's expectation of the future interest rate.

Accepted Answer

A) overestimates 
B) accurately estimates 
C) underestimates 
D) is an unbiased forecast of (it has an equal chance of overestimating or underestimating)

Question 8

A theory states that while investors and borrowers may normally concentrate on a particular natural maturity market, conditions may cause them to change maturity markets. This theory is called the

Accepted Answer

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

Question 9

The theory for the term structure of interest rates that says the shape of the yield curve is determined solely by expectations of future interest rates is called the

Accepted Answer

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

Question 10

The degree to which the Treasury's debt management policy could affect the term structure of interest rates is greatest if

Accepted Answer

A) most debt is financed by foreign investors. 
B) the Treasury's debt level is small. 
C) maturity markets are segmented. 
D) A and B

Question 11

The yield curve in a foreign country is

Accepted Answer

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

Question 12

Assume that the Treasury bond yield today is 2% higher than it was one year ago. Also assume that the credit (default) risk premium of an A-rated bond declined by 0.4% since one year ago. A newly issued A-rated bond will likely offer a yield today that is ____ the yield that was offered on an A-rated bond issued one year ago.

Accepted Answer

A) greater than 
B) equal to 
C) less than 
D) A or B are both common

Question 13

Which of the following statements is not true with respect to debt securities?

Accepted Answer

A) Some types of debt securities always offer a higher yield than others. 
B) Debt securities offer different yields because they exhibit different characteristics that influence the offered yield. 
C) In general, securities with favorable characteristics will offer higher yields to entice investors. 
D) All of the above are true with respect to debt securities.

Question 14

Within the category of capital market securities, municipal bonds have the ____ before-tax yield, and their after-tax yield is typically ____ of Treasury bonds from the perspective of investors in high tax brackets.

Accepted Answer

A) highest; below that 
B) lowest; above that 
C) highest; above that 
D) lowest; below that

Question 15

Because interest rates may vary significantly across countries at a given point in time, investors do not monitor the term structures of interest rates in foreign countries unless they are interested in investing in a particular foreign country.

Accepted Answer

A) True 
 B)False

Question 16

Some financial institutions such as commercial banks are required by law to invest only in

Accepted Answer

A) junk bonds. 
B) corporate stock. 
C) Treasury securities. 
D) investment-grade bonds.

Question 17

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 18

If shorter term securities have higher annualized yields than longer term securities, the yield curve

Accepted Answer

A) is horizontal. 
B) is upward sloping. 
C) is downward sloping. 
D) cannot be determined unless we know additional information (such as the level of market interest rates).

Question 19

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 20

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 ahead is ____ percent.

Accepted Answer

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

Exam 3: Structure of Interest Rates

Some types of debt securities always offer a higher yield than others.

Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to

Which of the following is not a characteristic affecting the yields on debt securities?

If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield curve should be

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 funds by borrowers and the yield curve will be sloping.

If interest rates are expected to decrease, the yield on new short-term securities may be expected to , and the yield curve should be sloping.

If liquidity influences the yield curve, but is not considered when deriving the forward interest rate, the forward interest rate ____ the market's expectation of the future interest rate.

A theory states that while investors and borrowers may normally concentrate on a particular natural maturity market, conditions may cause them to change maturity markets. This theory is called the

The theory for the term structure of interest rates that says the shape of the yield curve is determined solely by expectations of future interest rates is called the

The degree to which the Treasury's debt management policy could affect the term structure of interest rates is greatest if

The yield curve in a foreign country is

Which of the following statements is not true with respect to debt securities?

Within the category of capital market securities, municipal bonds have the before-tax yield, and their after-tax yield is typically of Treasury bonds from the perspective of investors in high tax brackets.

Because interest rates may vary significantly across countries at a given point in time, investors do not monitor the term structures of interest rates in foreign countries unless they are interested in investing in a particular foreign country.

Some financial institutions such as commercial banks are required by law to invest only in

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 shorter term securities have higher annualized yields than longer term securities, the yield curve

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

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 ahead is ____ percent.