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Investments, 4th Canadian Edition, 4/e

Zvi Bodie, Boston University School of Management
Alex Kane, University of California, San Diego
Alan Marcus, Boston College
Stylianos Perrakis, Concordia University
Peter Ryan, University of Ottawa

The Term Structure of Interest Rates

Multiple Choice Quiz

Prepared by William Lim, University of New Brunswick.


1	The yield curve shows at any point in time:
		A)	the relationship between yield on a bond and the time to maturity on the bond.
		B)	the relationship between the coupon rate on a bond and time to maturity of the bond.
		C)	the relationship between the yield on a bond and the duration of the bond.
		D)	all of the above.
		E)	none of the above.


2	According to the expectations hypothesis, an upward-sloping 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 first, then decrease.
		D)	interest rates are expected to decline first, then increase.
		E)	interest rates are expected to increase in the future.


3	The expectations theory of the term structure of interest rates states that
		A)	yields on long- and short-maturity bonds are determined by the supply and demand for the securities.
		B)	forward rates exceed the expected future interest rates.
		C)	forward rates are determined by investors' expectations of future interest rates.
		D)	all of the above.
		E)	none of the above.


4	The market segmentation theory of the term structure of interest rates
		A)	a. theoretically can explain all shapes of yield curves.
		B)	b. assumes that markets for different maturities are separate markets.
		C)	c. definitely holds in the "real world".
		D)	a. and b.
		E)	a. and c.


5	When computing yield to maturity, the implicit reinvestment assumption is that the interest payments are reinvested at the:
		A)	Coupon rate.
		B)	Yield to maturity at the time of the investment.
		C)	Current yield.
		D)	Prevailing yield to maturity at the time interest payments are received.
		E)	The average yield to maturity throughout the investment period.


6	The concepts of spot and forward rates are most closely associated with which one of the following explanations of the term structure of interest rates.
		A)	Expectations Hypothesis
		B)	Segmented Market theory
		C)	Preferred Habitat Hypothesis
		D)	Liquidity Premium theory
		E)	None of the above


7	The pure yield curve can be estimated
		A)	a. by using corporate bonds with different risk ratings.
		B)	b. by using zero-coupon bonds.
		C)	c. by using coupon bonds if each coupon is treated as a separate "zero."
		D)	d. by estimating liquidity premiums for different maturities.
		E)	b. and c.


8	Under the expectations hypothesis, when interest rates are expected to fall, we have a yield curve
		A)	constructed by using convertible bonds.
		B)	with a hump in the middle.
		C)	that slopes downward.
		D)	that slopes upward.
		E)	that is relatively flat.


9	Investors can use publicly available financial date to determine which of the following? I) forward interest rates II) the direction the Dow indexes are heading III) the shape of the yield curve IV) the actions to be taken by the Federal Reserve
		A)	I and II
		B)	I and III
		C)	I, II, and III
		D)	I, III, and IV
		E)	I, II, III, and IV


10	The Liquidity Preference Theory states that
		A)	Stocks are preferred to bonds because they are generally more liquid.
		B)	Treasury Bonds are preferred to corporate bonds because they are more liquid.
		C)	Liquidity premiums can be measured precisely.
		D)	Bonds of large corporations are preferred because they have the highest liquidity.
		E)	The liquidity premium is expected to be positive because short-term investors dominate the market.

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