Answer:
True
Question: Because the maturity risk premium is normally positive, the yield curve is normally upward sloping. a. True b. False
Answer:
a. True
Question: 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. True False
Answer:
False
Question: One of the four most fundamental factors that affect the cost of money as discussed in the text is the time preference for consumption. The higher the time preference, the lower the cost of money, other things held constant. a. True b. False
Answer:
b. False
Question: Assume that the current corporate bond yield curve is upward sloping, or normal. Under this condition, then we could be sure that a. Long-term interest rates are more volatile than short-term rates. b. Inflation is expected to decline in the future. c. The economy is not in a recession. d. Long-term bonds are a better buy than short-term bonds. e. Maturity risk premiums could help to explain the yield curve’s upward slope.
Answer:
e
Question: The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called “interest rate risk,” or “price risk.” True False
Answer:
True
Question: Assuming that the term structure of interest rates is determined as posited by the pure expectations theory, which of the following statements is CORRECT? a. In equilibrium, long-term rates must be equal to short-term rates. b. An upward-sloping yield curve implies that future short-term rates are expected to decline. c. The maturity risk premium is assumed to be zero.
Answer:
c
Question: If investors expect a zero rate of inflation, then the nominal rate of return on a very short-term U.S. Treasury bond should be equal to the real risk-free rate, r*. True False
Answer:
True
Question: 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:
True
Question: If the yield curve is upward sloping, then short-term debt will be cheaper than long-term debt. Thus, if a firm’s CFO expects the yield curve to continue to have an upward slope, this would tend to cause the current ratio to be relatively low, other things held constant.
Answer Options:
a. True
b. False
Answer:
a. True
Question: If the pure expectations theory is correct (that is, the maturity risk premium is zero), which of the following statements would be 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:
c
Question: Which of the following statements is CORRECT? a. Downward-sloping yield curves are inconsistent with the expectations theory. b. The actual shape of the yield curve depends only on expectations about future inflation. c. If the pure expectations theory is correct, a downward-sloping yield curve indicates that interest rates are expected to decline in the future. d. If the yield curve is upward sloping, the maturity risk premium must be positive and the inflation rate must be zero. e. Yield curves must be either upward or downward sloping—they cannot first rise and then decline.
Answer:
c
Question: An upward-sloping yield curve is often call a “normal” yield curve, while a downward-sloping yield curve is called “abnormal.” a. True b. False
Answer:
a. True
Question: The “yield curve” shows the relationship between bonds’ maturities and their yields. True False
Answer:
True
Question: Since yield curves are based on a real risk-free rate plus the expected rate of inflation, at any given time there can be only one yield curve, and it applies to both corporate and Treasury securities. True False
Answer:
False
Question: If the demand curve for funds increased but the supply curve remained constant, we would expect to see the total amount of funds supplied and demanded increase and interest rates in general also increase. a. True b. False
Answer:
a. True
Question: Since yield curves are based on a real risk-free rate plus the expected rate of inflation, at any given time there can be only one yield curve, and it applies to both corporate and Treasury securities. a. True b. False
Answer:
b. False
Question: If the Treasury yield curve were downward sloping, the yield to maturity on a 10-year Treasury coupon bond would be higher than that on a 1-year T-bill. True False
Answer:
False
Question: Which of the following statements is CORRECT? a. If the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping. b. If the maturity risk premium (MRP) equals zero, the Treasury bond yield curve must be flat. c. If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping. d. If the expectations theory holds, the Treasury bond yield curve will never be downward sloping. e. Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds.
Answer:
c
Question: If investors expect the rate of inflation to increase sharply in the future, then we should not be surprised to see an upward-sloping yield curve. True False
Answer:
True