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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, 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
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
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
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.
6
Treasury STRIPS are
A)securities issued by the Treasury with very long maturities.
B)extremely risky securities.
C)created by selling each coupon or principal payment from a whole Treasury bond as a separate cash flow.
D)created by pooling mortgage payments made to the Treasury.
E)C and D
7
If the value of a Treasury bond was lower than the value of the sum of its part (STRIPPED cash flows) you could
A)profit by buying the stripped cash flows and reconstituting the bond.
B)not profit by buying the stripped cash flows and reconstituting the bond.
C)profit by buying the bond and creating STRIPS.
D)B and C
E)none of the above
8
The pure yield curve can be estimated
A)by using zero-coupon Treasuries.
B)by using stripped Treasuries if each coupon is treated as a separate "zero."
C)by using corporate bonds with different risk ratings.
D)by estimating liquidity premiums for different maturities.
E)A and B
9
______ can occur if _____.
A)Arbitrage; the Law of One Price is not violated
B)Arbitrage; the Law of One Price is violated
C)Riskless economic profit; the Law of One Price is not violated
D)Riskless economic profit; the Law of One Price is violated
E)B and D
10
The yield curve is a component of
A)the Dow Jones Industrial Average.
B)the consumer price index.
C)the index of leading economic indicators.
D)the producer price index.
E)the inflation index.





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