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Quiz 2.pdf-Quiz 2 Question 1 of 10 Score: 0.2 ...
Quiz_2.pdf-Quiz 2 Question 1 of 10 Score: 0.2 (of possible 0.2 points) If the pure expectations theory is correct (that is, the maturity risk premium is zero), which of the following is
Quiz 2.pdf-Quiz 2 Question 1 of 10 ...
Quiz_2.pdf-Quiz 2 Question 1 of 10 Score: 0.2 (of possible 0.2 points) If the pure expectations theory is correct (that is, the maturity risk premium is zero), which of the following is
Page 1
Quiz 2
Question 1 of 10 Score: 0.2
(of possible
0.2
points)
If the pure expectations theory is correct (that is, the maturity risk premium is zero), which of the following is
CORRECT?
A.
An upward-sloping Treasury yield curve means that the market expects interest rates to decline in
the future.
B.
A 5-year T-bond would always yield less than a 10-year T-bond.
C.
The yield curve for corporate bonds may be upward sloping even if the Treasury yield curve is flat.
D.
The yield curve for stocks must be above that for bonds, but both yield curves must have the same
slope.
E.
If the maturity risk premium is zero for Treasury bonds, then it must be negative for corporate
bonds.
Answer Key: C
Question 2 of 10 Score: 0.2
(of possible
0.2
points)
In the foreseeable future, the real risk-free rate of interest, r*, is expected to remain at 3%, inflation is expected to
steadily increase, and the maturity risk premium is expected to be 0.1(t - 1)%, where t is the number of years
until the bond matures. Given this information, which of the following statements is CORRECT?
A.
The yield on 2-year Treasury securities must exceed the yield on 5-year Treasury securities.
B.
The yield on 5-year Treasury securities must exceed the yield on 10-year corporate bonds.
C.
The yield on 5-year corporate bonds must exceed the yield on 8-year Treasury bonds.
D.
The yield curve must be "humped."
E.
The yield curve must be upward sloping.
Answer Key: E
Question 3 of 10 Score: 0.2
(of possible
0.2
points)
The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time
preferences for consumption, (3) risk, and (4) inflation.
True
False
Answer Key: True
Question 4 of 10 Score: 0.2
(of possible
0.2
points)
Which of the following would be most likely to lead to a higher level of interest rates in the economy?
A.
Households start saving a larger percentage of their income.
B.
Corporations step up their expansion plans and thus increase their demand for capital.
Page 2
C.
The level of inflation begins to decline.
D.
The economy moves from a boom to a recession.
E.
The Federal Reserve decides to try to stimulate the economy.
Answer Key: B
Question 5 of 10 Score: 0.2
(of possible
0.2
points)
Because the maturity risk premium is normally positive, the yield curve must have an upward slope. If you
measure the yield curve and find a downward slope, you must have done something wrong.
True
False
Answer Key: False
Question 6 of 10 Score: 0.2
(of possible
0.2
points)
The real risk-free rate of interest is expected to remain constant at 3% for the foreseeable future. However,
inflation is expected to increase steadily over the next 30 years, so the Treasury yield curve has an upward slope.
Assume that the pure expectations theory holds. You are also considering two corporate bonds, one with a 5-year
maturity and one with a 10-year maturity. Both have the same default and liquidity risks. Given these
assumptions, which of these statements is CORRECT?
A.
Since the pure expectations theory holds, the 10-year corporate bond must have the same yield as
the 5-year corporate bond.
B.
Since the pure expectations theory holds, all 5-year Treasury bonds must have higher yields than all
10-year Treasury bonds.
C.
Since the pure expectations theory holds, all 10-year corporate bonds must have the same yield as
10-year Treasury bonds.
D.
The 10-year Treasury bond must have a higher yield than the 5-year corporate bond.
E.
The 10-year corporate bond must have a higher yield than the 5-year corporate bond.
Answer Key: E
Question 7 of 10 Score: 0.2
(of possible
0.2
points)
During periods when inflation is increasing, interest rates tend to increase, while interest rates tend to fall when
inflation is declining.
True
False
Answer Key: True
Question 8 of 10 Score: 0.2
(of possible
0.2
points)
One of the four most fundamental factors that affect the cost of money as discussed in the text is the expected
rate of inflation. If inflation is expected to be relatively high, then interest rates will tend to be relatively low,
other things held constant.=
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