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Exam 3: Structure of Interest Rates

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Question 41

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

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

F) A) and E)
G) A) and D)

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Question 42

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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.

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

E) None of the above
F) A) and B)

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Question 43

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

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.

The yield curve in a foreign country is

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.

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.

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.

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

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

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

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

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

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.

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

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.

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

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

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