Question 1

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 2

The higher a bond rating, the lower the perceived default risk.

Accepted Answer

A) True 
 B)False

Question 3

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 4

The graphic comparison of maturities and annualized yields is known as the interest rate curve.

Accepted Answer

A) True 
 B)False

Question 5

According to the pure expectations theory of the term structure of interest rates, the ____ the difference between the implied one-year forward rate and today's one-year interest rate, the ____ is the expected change in the one-year interest rate.

Accepted Answer

A) greater; less 
B) less; greater 
C) greater; greater 
D) less; less 
E) C and D

Question 6

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

Question 7

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, then the one-year forward rate is

Accepted Answer

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

Question 8

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 9

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 10

If research showed that anticipation about future interest rates was the only important factor for all investors in choosing short-term or long-term securities, this would support the argument made by the

Accepted Answer

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

Question 11

Default risk is likely to be highest for

Accepted Answer

A) short-term Treasury securities. 
B) AAA corporate securities. 
C) long-term Treasury securities. 
D) BBB corporate securities.

Question 12

According to pure expectations theory, if interest rates are expected to decrease, there will be ____ pressure on the demand for short-term funds by borrowers and ____ pressure on the demand for long-term funds issued by borrowers.

Accepted Answer

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

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

If the Treasury uses a relatively large proportion of ____ debt to finance a budget deficit, this would place ____ pressure on long-term yields.

Accepted Answer

A) short-term; downward 
B) long-term; downward 
C) short-term; upward 
D) long-term; upward

Question 15

Assume that today, the annualized two-year interest rate is 12 percent, and the one-year interest rate is 9 percent.A three-year security has an annualized interest rate of 14 percent.What is the one-year forward rate two years from now?

Accepted Answer

A) 12.67 percent 
B) 113 percent 
C) 195 percent 
D) 15.67 percent 
E) none of the above

Question 16

Interest income from municipal bonds is exempt from state taxes but is subject to federal taxes.

Accepted Answer

A) True 
 B)False

Question 17

If the Treasury uses a relatively large proportion of ____ debt to finance the deficit, this may place upward pressure on ____ interest rates, and corporations may reduce their investment in fixed assets.

Accepted Answer

A) long-term; long-term 
B) long-term; short-term 
C) short-term; long-term 
D) B and C

Question 18

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 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

Vaughn Corporation is considering the issue of commercial paper and would like to know the yield it should offer on its commercial paper.The corporation believes that a 0.2 percent default risk premium, a 0.1 percent liquidity premium, and a 0.3 percent tax adjustment are necessary to sell its commercial paper to investors.Furthermore, annualized T-bill rates are 7 percent.Based on this information, Vaughn should offer ____ percent on its commercial paper.

Accepted Answer

A) 8.0 
B) 7.6 
C) 7.5 
D) 7.9 
E) none of the above

Exam 3: Structure of Interest Rates

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

The higher a bond rating, the lower the perceived default risk.

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.

The graphic comparison of maturities and annualized yields is known as the interest rate curve.

According to the pure expectations theory of the term structure of interest rates, the the difference between the implied one-year forward rate and today's one-year interest rate, the is the expected change in the one-year interest rate.

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.

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, then the one-year forward rate is

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

The yield curve in a foreign country is

If research showed that anticipation about future interest rates was the only important factor for all investors in choosing short-term or long-term securities, this would support the argument made by the

Default risk is likely to be highest for

According to pure expectations theory, if interest rates are expected to decrease, there will be pressure on the demand for short-term funds by borrowers and pressure on the demand for long-term funds issued by borrowers.

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

If the Treasury uses a relatively large proportion of debt to finance a budget deficit, this would place pressure on long-term yields.

Assume that today, the annualized two-year interest rate is 12 percent, and the one-year interest rate is 9 percent.A three-year security has an annualized interest rate of 14 percent.What is the one-year forward rate two years from now?

Interest income from municipal bonds is exempt from state taxes but is subject to federal taxes.

If the Treasury uses a relatively large proportion of debt to finance the deficit, this may place upward pressure on interest rates, and corporations may reduce their investment in fixed assets.

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.

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