Answer:
False
Question: Assume that interest rates on 20-year Treasury and corporate bonds are as follows: T-bond = 7.72% AAA = 8.72% A = 9.64% BBB = 10.18% The differences in these rates were probably caused primarily by: a. Tax effects. b. Default and liquidity risk differences. c. Maturity risk differences. d. Inflation differences. e. Real risk-free rate differences.
Answer:
b
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. a. True b. False
Answer:
a. True
Question: If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill? a. The yield on a 10-year bond would be less than that on a 1-year bill. b. The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium. c. It is impossible to tell without knowing the coupon rates of the bonds. d. The yields on the two securities would be equal. e. It is impossible to tell without knowing the relative risks of the two securities.
Answer:
a
Question: Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 10.18% The differences in rates among these issues were most probably caused primarily by: a. Real risk-free rate differences. b. Tax effects. c. Default and liquidity risk differences. d. Maturity risk differences. e. Inflation differences.
Answer:
c
Question: 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. 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:
b
Question: Inflation is expected to increase steadily over the next 10 years, there is a positive maturity risk premium on both Treasury and corporate bonds, and the real risk-free rate of interest is expected to remain constant. Which of the following statements is CORRECT? a. The yield on 10-year Treasury securities must exceed the yield on 7-year Treasury securities. b. The yield on any corporate bond must exceed the yields on all Treasury bonds. c. The yield on 7-year corporate bonds must exceed the yield on 10-year Treasury bonds. d. The stated conditions cannot all be true—they are internally inconsistent. e. The Treasury yield curve under the stated conditions would be humped rather than have a consistent positive or negative slope.
Answer:
a
Question: Which of the following factors would be most likely to lead to an increase in nominal interest rates? a. Households reduce their consumption and increase their savings. b. A new technology like the Internet has just been introduced, and it increases investment opportunities. c. There is a decrease in expected inflation.
Answer:
b
Question: The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present. True False
Answer:
True
Question: If the pure expectations theory is correct, a downward-sloping yield curve indicates that interest rates are expected to decline in the future. a. True b. False
Answer:
a. True
Question: The Federal Reserve tends to take actions to increase interest rates when the economy is very strong and to decrease rates when the economy is weak. True False
Answer:
True
Question: Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is CORRECT, other things held constant? a. If the pure expectations theory holds, the Treasury yield curve must be downward sloping. b. If the pure expectations theory holds, the corporate yield curve must be downward sloping. c. If there is a positive maturity risk premium, the Treasury yield curve must be upward sloping. d. If inflation is expected to decline, there can be no maturity risk premium. e. The expectations theory cannot hold if inflation is decreasing.
Answer:
a
Question: If the pure expectations theory holds, which of the following statements is CORRECT? a. The yield curve for both Treasury and corporate bonds should be flat. b. The yield curve for Treasury securities would be flat, but the yield curve for corporate securities might be downward sloping. c. The yield curve for Treasury securities cannot be downward sloping. d. The maturity risk premium would be zero. e. If 2-year bonds yield more than 1-year bonds, an investor with a 2-year time horizon would almost certainly end up with more money if he or she bought 2-year bonds.
Answer:
d
Question: Assume the following: The real risk-free rate, r*, is expected to remain constant at 3%. Inflation is expected to be 3% next year and then to be constant at 2% a year thereafter. The maturity risk premium is zero. Given this information, which of the following statements is CORRECT? a. The yield curve for U.S. Treasury securities will be upward sloping. b. A 5-year corporate bond must have a lower yield than a 5-year Treasury security. c. A 5-year corporate bond must have a lower yield than a 7-year Treasury security. d. The real risk-free rate cannot be constant if inflation is not expected to remain constant. e. This problem assumed a zero maturity risk premium, but that is probably not valid in the real world.
Answer:
a
Question: Because the maturity risk premium is normally positive, the yield curve is normally upward sloping. True False
Answer:
True