Q1. Complete the following multiple choice questions:
(1) When yield curves are steeply upward sloping,
A) long-term interest rates are above short-term interest rates.
B) short-term interest rates are above long-term interest rates.
C) short-term interest rates are about the same as long-term interest rates.
D) medium-term interest rates are above both short-term and long-term interest rates.
(2) An inverted yield curve
A) slopes up.
B) is flat.
C) slopes down.
D) has a U shape.
(3) Differences in ________ explain why interest rates on Treasury securities are not all the same.
A) risk
B) liquidity
C) time to maturity
D) tax characteristics
(4) According to the expectations theory of the term structure
A) the interest rate on long-term bonds will exceed the average of short-term interest rates
that people expect to occur over the life of the long-term bonds, because of their preference for short-term securities.
B) interest rates on bonds of different maturities move together over time.
C) buyers of bonds prefer short-term to long-term bonds.
D) buyers require an additional incentive to hold long-term bonds.
(5) According to the segmented markets theory of the term structure
A) the interest rate on long-term bonds will equal an average of short-term interest rates
that people expect to occur over the life of the long-term bonds.
B) buyers of bonds do not prefer bonds of one maturity over another.
C) interest rates on bonds of different maturities do not move together over time.
D) buyers require an additional incentive to hold long-term bonds.
(6) According to the liquidity premium theory of the term structure
A) bonds of different maturities are not substitutes.
B) if yield curves are downward sloping, then short-term interest rates are expected to fall by so much that, even when the positive term premium is added, long-term rates fall below short-term rates.
C) yield curves should never slope downward.
D) interest rates on bonds of different maturities do not move together over time.
(7) If the yield curve is flat for short maturities and then slopes downward for longer maturities,
the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates
that the market is predicting.
A) a rise in short-term interest rates in the near future and a decline further out in the
future.
B) constant short-term interest rates in the near future and a decline further out in the
future.
C) a decline in short-term interest rates in the near future and a rise further out in the
future.
D) a decline in short-term interest rates in the near future and an even steeper decline
further out in the future.
(8) According to the liquidity premium theory of the term structure, a steeply upward sloping
yield curve indicates that short-term interest rates are expected to
A) rise in the future.
B) remain unchanged in the future.
C) decline moderately in the future.
D) decline sharply in the future.
(9) According to the liquidity premium theory of the term structure, a slightly upward sloping
yield curve indicates that short-term interest rates are expected to
A) rise in the future.
B) remain unchanged in the future.
C) decline moderately in the future.
D) decline sharply in the future.
(10) The expectations theory and the segmented markets theory do not explain the facts very well,
but they provide the groundwork for the most widely accepted theory of the term structure of
interest rates,
A) the Keynesian theory.
B) separable markets theory.
C) liquidity premium theory.
D) the asset market approach.
Q2. On the 1st of March 1996 -the day of his investment decision- the rate on the one-year bonds is 6% and the two-year bonds is 4% and the three-year bonds is 7%.
a) Draw the yield curve for this date.
b) Use the Expectations Hypothesis to derive the expected one-year rate for the next year.
c) Use your answer in (b) to forecast the expected 1-year rate in two years from now.
Q3. Explain the rationale for the Segmented-Markets Theory. To what extent does this theory explain reality?
Q4. What is the rationale behind the Expectations Theory? What are this theory’s major strengths and weaknesses?
to be completed by 12:00 GMT 23/02/11 - please do not bid if you cannot do so.
it is a simple one hour task - thanks for bidding!