Question 1

Assume the expectations hypothesis regarding the term structure of interest rates is correct. Then, if the current two-year interest rate is 5% and the current one-year rate is 6%, then investors expect the future one-year rate to be:

Accepted Answer

A)   4%.
B)   5%.
C)   6%.
D)   1%.E) A) and B)
F) C) and D)

Question 2

The paper-bill spread refers to the interest rate spread between commercial paper and Treasury bills with the same maturity. Is this a risk spread or a term spread? How do you expect the paper-bill spread is related to GDP growth? What is the intuition for this result? What does this imply about the yield curve?

Accepted Answer

This is a risk spread because it compare...

Question 3

Municipal bonds are issued by:

Accepted Answer

A)   cities only.
B)   the U.S. Treasury, but the proceeds can only be used by cities.
C)   states and cities, but their interest is taxable only at the federal level.
D)   states and cities and their interest is exempt from U.S. government taxation.E) B) and C)
F) A) and D)

Question 4

Suppose the economy has an inverted yield curve. According to the liquidity premium theory, which of the following interpretations could be used to explain this?

Accepted Answer

A)   Interest rates are expected to rise in the future.
B)   Investors expect an economic slowdown.
C)   Investors are indifferent between bonds with different time horizons.
D)   The term spread has increased.E) A) and B)
F) A) and C)

Question 5

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.E) A) and B)
F) B) and D)

Question 6

An inverted yield curve is a valuable forecasting tool because:

Accepted Answer

A)   the yield curve usually is inverted so it reflects a growing economy.
B)   the yield curve seldom is inverted and can signal an economic slowdown.
C)   investors are expecting higher short-term rates in the future, and this usually signals an economic slowdown.
D)   inverted yield curves signal better economic times are expected.E) None of the above
F) B) and C)

Question 7

We would expect the relationship between the risk spread on Baa bonds and U.S. Treasury securities of similar maturities to:

Accepted Answer

A)   vary directly with economic growth.
B)   show no variation over the business cycle.
C)   vary inversely with economic growth.
D)   be uncorrelated with economic growth.E) None of the above
F) All of the above

Question 8

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.E) A) and D)
F) C) and D)

Question 9

Interest on most bonds issued by states is usually exempt from:

Accepted Answer

A)   state income tax but not federal.
B)   from federal income tax but not state.
C)   both state and federal income taxes.
D)   from city income taxes.E) A) and B)
F) All of the above

Question 10

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.E) A) and D)
F) All of the above

Exam 7: The Risk and Term Structure of Interest Rates

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

Correct Answer
verified

Assume the expectations hypothesis regarding the term structure of interest rates is correct. Then, if the current two-year interest rate is 5% and the current one-year rate is 6%, then investors expect the future one-year rate to be:

Correct Answer
verified

An inverted yield curve is a valuable forecasting tool because:

Correct Answer
verified

Suppose the economy has an inverted yield curve. According to the liquidity premium theory, which of the following interpretations could be used to explain this?

Correct Answer
verified

Taxes play an important role in bond returns because:

Correct Answer
verified

Interest on most bonds issued by states is usually exempt from:

Correct Answer
verified

We would expect the relationship between the risk spread on Baa bonds and U.S. Treasury securities of similar maturities to:

Correct Answer
verified

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

Correct Answer
verified

Municipal bonds are issued by:

Correct Answer
verified

Correct Answer
verified
This is a risk spread because it compare...
View Answer

Exam 7: The Risk and Term Structure of Interest Rates

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

Correct AnswerverifiedShow Answer

Assume the expectations hypothesis regarding the term structure of interest rates is correct. Then, if the current two-year interest rate is 5% and the current one-year rate is 6%, then investors expect the future one-year rate to be:

Correct AnswerverifiedShow Answer

An inverted yield curve is a valuable forecasting tool because:

Correct AnswerverifiedShow Answer

Suppose the economy has an inverted yield curve. According to the liquidity premium theory, which of the following interpretations could be used to explain this?

Correct AnswerverifiedShow Answer

Taxes play an important role in bond returns because:

Correct AnswerverifiedShow Answer

Interest on most bonds issued by states is usually exempt from:

Correct AnswerverifiedShow Answer

We would expect the relationship between the risk spread on Baa bonds and U.S. Treasury securities of similar maturities to:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Municipal bonds are issued by:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedThis is a risk spread because it compare...View AnswerShow Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified
This is a risk spread because it compare...
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