# 6a - Interest Rates - Solutions 1. * An abnormal or...

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Old Exam Questions - Interest Rates - Solutions Page 1 of 49 Pages Interest Rates - Solutions 1. An abnormal or inverted yield curve is the same as a downward sloping yield curve. * A. True B. False 2. Dell Corporation would be involved in a spot market transaction if it were to agree today to sell 500 computers, seven months from now at a price of \$500 each, to Best Buy. A. True * B. False 3. In general we may say that interest rates should fall during an economic boom and rise during an economic recession. A. True * B. False 4. If the pure expectations theory of the term structure is correct, then an upward sloping yield curve implies a positive maturity risk premium (MRP). A. True * B. False 5. If the yield curve is upward sloping, the yield on a 2-year corporate bond must be less than the yield on a 5-year Treasury bond. A. True * B. False 6. If the yield curve is downward sloping, the yield on a 10-year Treasury bond must be less than the yield on an 8-year corporate bond. * A. True B. False 7. Under the Liquidity Premium theory of the term structure, and assuming a positive maturity risk premium, we should never observe a flat or downward sloping yield curve. A. True * B. False

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Old Exam Questions - Interest Rates - Solutions Page 2 of 49 Pages 8. In general, it is said that an upward sloping yield curve indicates that investors expect interest rates to increase in the future. However, this may not necessarily be true if we consider the existence of a maturity premium. * A. True B. False 9. According to the CAPM/SML, a security with a beta of -2.0 should have the same degree of co-movement with respect to the market as a security with a beta of +2.0, just in the opposite direction. * A. True B. False 1. Assume that the economy has been experiencing relatively high rates of interest due to high levels of inflation. If the Federal Reserve wishes to lower the rate of inflation, then which of the following actions might be most successful in accomplishing their goals? A. Buy U.S. Treasury securities for the Federal Reserve portfolio from the general public, which would loosen the money supply, lower interest rates, and help to lower the rate of inflation. * B. Sell U.S. Treasury securities from the Federal Reserve portfolio to the general public, which would tighten the money supply, increase interest rates, and help to lower the rate of inflation. C. Decrease the discount rate and the Fed Funds rate, which would lower interest rates charged by financial institutions and thus lower the rate of inflation. D. Decrease the reserve requirement, which would decrease the multiplier effect, tighten the supply of money, and lead to higher interest rates and lower rates of inflation. E.
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## This note was uploaded on 09/20/2009 for the course FIN 3403 taught by Professor Tapley during the Spring '06 term at University of Florida.

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6a - Interest Rates - Solutions 1. * An abnormal or...

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