Answer:
False
Question: The risk that interest rates will decline, and that decline will lead to a decline in the income provided by a bond portfolio as interest and maturity payments are reinvested, is called “reinvestment rate risk.” a. True b. False
Answer:
a. True
Question: 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 the following 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:
e
Question: 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:
False
Question: Assuming the pure expectations theory is correct, which of the following statements is CORRECT? a. If 2-year Treasury bond rates exceed 1-year rates, then the market must expect interest rates to rise. b. If both 2-year and 3-year Treasury rates are 7%, then 5-year rates must also be 7%. c. If 1-year rates are 6% and 2-year rates are 7%, then the market expects 1-year rates to be 6.5% in one year. d. Reinvestment rate risk is higher on long-term bonds, and interest rate (price) risk is higher on short-term bonds. e. Interest rate (price) risk and reinvestment rate risk are relevant to investors in corporate bonds, but these concepts do not apply to Treasury bonds.
Answer:
a
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.” a. True b. False
Answer:
a. True
Question: Which of the following statements is CORRECT? a. If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope. b. Liquidity premiums are generally higher on Treasury than corporate bonds. c. The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds. d. Default risk premiums are generally lower on corporate than on Treasury bonds. e. Reinvestment risk is lower, other things held constant, on long-term than on short-term bonds.
Answer:
e
Question: The risk that interest rates will decline, and that decline will lead to a decline in the income provided by a bond portfolio as interest and maturity payments are reinvested, is called “reinvestment rate risk.” True False
Answer:
True
Question: One of the four most fundamental factors that affect the cost of money as discussed in the text is the availability of production opportunities and their expected rates of return. If production opportunities are relatively good, then interest rates will tend to be relatively high, other things held constant. True False
Answer:
True
Question: One of the four most fundamental factors that affect the cost of money as discussed in the text is the availability of production opportunities and their expected rates of return. If production opportunities are relatively good, then interest rates will tend to be relatively high, other things held constant. a. True b. False
Answer:
a. True
Question: Which of the following statements is CORRECT? a. If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices. b. The total yield on a bond is derived from dividends plus changes in the price of the bond. c. Bonds are generally regarded as being riskier than common stocks, and therefore bonds have higher required returns. d. Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies. e. The market price of a bond will always approach its par value as its maturity date approaches, provided the bond’s required return remains constant.
Answer Options:
a. If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.
b. The total yield on a bond is derived from dividends plus changes in the price of the bond.
c. Bonds are generally regarded as being riskier than common stocks, and therefore bonds have higher required returns.
d. Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies.
e. The market price of a bond will always approach its par value as its maturity date approaches, provided the bond’s required return remains constant.
Answer:
e
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. a. True b. False
Answer:
a. True