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Multiple Choice Quiz
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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, a normal 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 market segmentation theory of the term structure of interest rates
A)theoretically can explain all shapes of yield curves.
B)assumes that markets for different maturities are separate markets.
C)definitely holds in the "real world".
D)A and B.
E)A and C.
4
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.
5
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 are true.
6
The pure yield curve can be estimated
A)by using corporate bonds with different risk ratings.
B)by using zero-coupon bonds.
C)by using coupon bonds if each coupon is treated as a separate "zero."
D)by estimating liquidity premiums for different maturities.
E)B and C
7
An inverted yield curve is one
A)constructed by using convertible bonds.
B)with a hump in the middle.
C)that slopes downward.
D)that plots the inverse relationship between bond prices and bond yields.
E)that is relatively flat.
8
The "break-even" interest rate for year n that equates the return on an n-period zero-coupon bond to that of an n-1-period zero-coupon bond rolled over into a one-year bond in year n is defined as
A)the forward rate.
B)the short rate.
C)the yield to maturity.
D)the discount rate.
E)None of the above.
9
According to the "liquidity preference" theory of the term structure of interest rates, the yield curve usually should be:
A)inverted.
B)normal.
C)upward sloping
D)A and B.
E)B and C.
10
Forward rates ____________ future short rates because ____________.
A)are equal to; they are both extracted from yields to maturity.
B)are equal to; they are perfect forecasts.
C)differ from; they are imperfect forecasts.
D)differ from; forward rates are estimated from dealer quotes while future short rates are extracted from yields to maturity.
E)are equal to; although they are estimated from different sources they both are used by traders to make purchase decisions.





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