Question 1

The ____ 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) pure expectations 
B) liquidity premium 
C) segmented markets 
D) preferred habitat

Question 2

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 3

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 4

Other things equal, the yield required on A-rated bonds should be ____ the yield required on B-rated bonds whose other characteristics are exactly the same.

Accepted Answer

A) greater than 
B) equal to 
C) less than 
D) All of the above are possible, depending on the size of the bond offering.

Question 5

The term structure of interest rates defines the relationship between maturity and annualized yield, holding other factors such as risk constant.

Accepted Answer

A) True 
 B)False

Question 6

Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of T-bills.This action will ____ the supply of T-bills in the market and places ____ pressure on the yield of T-bills.

Accepted Answer

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

Question 7

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 8

According to segmented markets theory, if investors have mostly short-term funds available and borrowers want long-term funds, there would be ____ pressure on the supply of short-term funds provided by investors and ____ pressure on the yield of long-term securities.

Accepted Answer

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

Question 9

If a yield curve is upward sloping, the investment strategy of buying long-term securities, then selling them after a short period (say, one year) is called

Accepted Answer

A) riding the yield curve. 
B) liquidating the yield curve. 
C) segmenting the yield curve. 
D) a forward roll. 
E) none of the above

Question 10

The yield offered on a debt security is ____ related to the prevailing risk-free rate and ____ related to the security's risk premium.

Accepted Answer

A) negatively; negatively 
B) positively; positively 
C) negatively; positively 
D) positively; negatively

Question 11

Treasury securities are exempt from federal and state income taxes.

Accepted Answer

A) True 
 B)False

Question 12

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

Question 13

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 14

When expectations theory is combined with the liquidity theory, the yield on a security will always be equal to the yield from consecutive investments in shorter-term securities over the same investment horizon.

Accepted Answer

A) True 
 B)False

Question 15

Credit ratings are most commonly used to indicate which financial institutions have available funds that they can lend to borrowers.

Accepted Answer

A) True 
 B)False

Question 16

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 17

If the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on longer-term securities, even when they have funds for only a short period of time.This strategy is known as riding the yield curve.

Accepted Answer

A) True 
 B)False

Question 18

The yield curve for corporate bonds.

Accepted Answer

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

Question 19

Other things being equal, an expected decrease in interest rates will increase the demand for long-term funds by borrowers.

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 3: Structure of Interest Rates

The ____ 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.

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.

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?

Other things equal, the yield required on A-rated bonds should be ____ the yield required on B-rated bonds whose other characteristics are exactly the same.

The term structure of interest rates defines the relationship between maturity and annualized yield, holding other factors such as risk constant.

Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of T-bills.This action will the supply of T-bills in the market and places pressure on the yield of T-bills.

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 short-term funds available and borrowers want long-term funds, there would be pressure on the supply of short-term funds provided by investors and pressure on the yield of long-term securities.

If a yield curve is upward sloping, the investment strategy of buying long-term securities, then selling them after a short period (say, one year) is called

The yield offered on a debt security is related to the prevailing risk-free rate and related to the security's risk premium.

Treasury securities are exempt from federal and state income taxes.

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

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

When expectations theory is combined with the liquidity theory, the yield on a security will always be equal to the yield from consecutive investments in shorter-term securities over the same investment horizon.

Credit ratings are most commonly used to indicate which financial institutions have available funds that they can lend to borrowers.

If the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on longer-term securities, even when they have funds for only a short period of time.This strategy is known as riding the yield curve.

The yield curve for corporate bonds.

Other things being equal, an expected decrease in interest rates will increase the demand for long-term funds by borrowers.

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