Chap015 - Chapter 15 The Term Structure of Interest Rates...

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Chapter 15 The Term Structure of Interest Rates Multiple Choice Questions 1. The term structure of interest rates is: A) The relationship between the rates of interest on all securities. B) The relationship between the interest rate on a security and its time to maturity. C) The relationship between the yield on a bond and its default rate. D) All of the above. E) None of the above. Answer: B Difficulty: Easy Rationale: The term structure of interest rates is the relationship between two variables, years and yield to maturity (holding all else constant). 2. The yield curve shows at any point in time: A) The relationship between the yield on a bond and the duration of the bond. B) The relationship between the coupon rate on a bond and time to maturity of the bond. C) The relationship between yield on a bond and the time to maturity on the bond. D) All of the above. E) None of the above. Answer: C Difficulty: Easy Rationale: See rationale for question 15.1. 3. An inverted yield curve implies that: A) Long-term interest rates are lower than short-term interest rates. B) Long-term interest rates are higher than short-term interest rates. C) Long-term interest rates are the same as short-term interest rates. D) Intermediate term interest rates are higher than either short- or long-term interest rates. E) none of the above. Answer: A Difficulty: Easy Rationale: The inverted, or downward sloping, yield curve is one in which short-term rates are higher than long-term rates. The inverted yield curve has been observed frequently, although not as frequently as the upward sloping, or normal, yield curve. Bodie, Investments, Sixth Edition 1
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Chapter 15 The Term Structure of Interest Rates 4. An upward sloping yield curve is a(n) _______ yield curve. A) normal. B) humped. C) inverted. D) flat. E) none of the above. Answer: A Difficulty: Easy Rationale: The upward sloping yield curve is referred to as the normal yield curve, probably because, historically, the upward sloping yield curve is the shape that has been observed most frequently. 5. According to the expectations hypothesis, a normal yield curve implies that A) interest rates are expected to remain stable in the future. B) interest rates are expected to decline in the future. C) interest rates are expected to increase in the future. D) interest rates are expected to decline first, then increase. E) interest rates are expected to increase first, then decrease. Answer: C Difficulty: Easy Rationale: An upward sloping yield curve is based on the expectation that short-term interest rates will increase. 6. Which of the following is not proposed as an explanation for the term structure of interest rates: A) The expectations theory. B) The liquidity preference theory.
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This note was uploaded on 02/24/2010 for the course FINA 4310 taught by Professor Impson during the Spring '10 term at North Texas.

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Chap015 - Chapter 15 The Term Structure of Interest Rates...

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