Chapter 15
The Term Structure of Interest Rates
334
Bodie, Investments, Sixth Edition
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) Longterm interest rates are lower than shortterm interest rates.
B) Longterm interest rates are higher than shortterm interest rates.
C) Longterm interest rates are the same as shortterm interest rates.
D) Intermediate term interest rates are higher than either short or longterm interest
rates.
E) none of the above.
Answer: A
Difficulty: Easy
Rationale: The inverted, or downward sloping, yield curve is one in which shortterm
rates are higher than longterm rates.
The inverted yield curve has been observed
frequently, although not as frequently as the upward sloping, or normal, yield curve.
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View Full DocumentChapter 15
The Term Structure of Interest Rates
Bodie, Investments, Sixth Edition
335
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 shortterm
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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 Spring '08
 SZEIDL
 Economics, Interest Rates, Yield Curve

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