Suppose that there is a nonparallel downward shift in the yield curve. Which of the following best explains this phenomenon?
A)
The absolute yield increase is different for some maturities.
B)
The absolute yield decrease is different for some maturities.
C)
The yield decrease is the same for all maturities.
A nonparallel downward yield curve shift indicates an unequal yield decrease across all maturities, i.e., some maturity yields declined more than others.作者: Mechanic 时间: 2012-4-2 16:48
Suppose that there is a parallel upward shift in the yield curve. Which of the following best explains this phenomenon? The yield:
A)
decrease is the same for all maturities.
B)
increase is proportional to the original level for all maturities.
C)
increase is the same for all maturities.
A parallel upward shift indicates an equal yield increase across all maturities.作者: Mechanic 时间: 2012-4-2 16:49
A yield curve is flat, and then it undergoes a non-parallel shift. After the shift, which of the following must be least accurate? The new yield curve is:
A)
curvilinear.
B)
flat.
C)
a straight line.
If a yield curve begins flat and then experiences a non-parallel shift, this means that some rates changed more than others. After the non-parallel shift the formerly flat yield curve can no longer be flat.作者: Mechanic 时间: 2012-4-2 16:50
Assuming there is a positive butterfly shift in the yield curve, which of the following statements is most accurate?
A)
The curvature of the yield curve increases.
B)
The yield curve becomes less humped at intermediate maturities.
C)
The curvature of the yield curve decreases.
A butterfly shift occurs when yields increase (decrease), the yields in the short maturity and long maturity sectors increase more (less) than the yields in the intermediate maturity sector.作者: Mechanic 时间: 2012-4-2 16:50
Which of the following is most likely to occur if there is a twist in the yield curve?
A)
The yield curve flattens or steepens.
B)
The curvature of the yield curve increases.
C)
The yield curve becomes humped at intermediate maturities.
Twists refer to yield curve changes when the slope becomes either flatter or more steep. A flattening (steepening) of the yield curve means that the spread between short- and long-term rates has narrowed (widened).作者: Mechanic 时间: 2012-4-2 16:50
With respect to yield curve, a negative butterfly shift means that the yield curve has become:
A)
negatively sloped for all regions.
B)
more curved.
C)
flat.
By definition, a negative butterfly shift means the curve has become more curved or “humped.” Such a shift could lead to an increase in slope in some regions and a decrease in slope in other regions.作者: Mechanic 时间: 2012-4-2 16:51
Suppose the yield curve becomes steeper. Which of the following is a consequence of the steepening?
A)
Long-term bonds become less sensitive to interest rate changes.
B)
The yield spread between long and short-term securities increases.
C)
Long-term bonds become more sensitive to interest rate changes.
This is by definition. A steepening yield curve means that the slope of the yield curve increases. The slope is the difference (i.e. the term spread) between the yields of two maturities. Consequently, as the yield curve steepens this spread increases.作者: Mechanic 时间: 2012-4-2 16:51
A yield curve undergoes a parallel shift. With respect to the bonds described by the yield curve, the shift has least likely changed the:
A)
durations.
B)
yield to maturities.
C)
yield spreads for bonds of different maturities.
A yield curve is on a graph with interest rates on the vertical axis and maturities on the horizontal axis. A parallel shift of a yield curve means the spread between the interest rates or the “yield spreads” have not changed. The other possible choices to answer the question would change. By definition, the yields to maturity have changed. Since duration changes with changes in yield, all the durations would change.作者: Mechanic 时间: 2012-4-2 16:51
Which of the following statements about yield curves is most likely accurate?
A)
A yield curve gets steeper when spreads widen.
B)
A negative butterfly means that the yield curve has become less curved.
C)
A twist refers to changes to the degree to which the yield curve is humped.
A twist refers to yield curve changes when the slope becomes either flatter or steeper. A negative butterfly means that the yield curve has become more curved.作者: Mechanic 时间: 2012-4-2 16:52
Which of the following statements about yield curves is least accurate?
A)
A positive butterfly means that the yield curve has become less curved.
B)
Twists and butterfly shifts are examples of nonparallel yield curve shifts.
C)
The slope of the yield curve changes slightly following a parallel shift.
The slope of the yield curve never changes following a parallel shift.作者: Mechanic 时间: 2012-4-2 16:53
Changes in which of the following factors has been observed to be the most important driving force for Treasury returns?
A)
Level of interest rates.
B)
Slope of the yield curve.
C)
Coupon of Treasury securities.
In regressions, changes in the level of the interest rate have been shown to explain about 90% of the Treasury return variance.作者: Mechanic 时间: 2012-4-2 16:53
Change in which of the following is NOT a factor that has been observed to drive Treasury returns?
A)
The coupon of Treasury securities.
B)
The level of interest rates.
C)
The curvature of the yield curve.
The coupon for Treasury securities is constant.作者: Mechanic 时间: 2012-4-2 16:54
Research studies have identified three factors that explain historical Treasury returns. Which of the following is the factor with the most explanatory power? Changes in the:
A)
slope of the yield curve.
B)
level of interest rates.
C)
default risk premium.
Default risk is not relevant for Treasury securities. Changes in the level of interest rates accounts for almost 90% of the observed variation in total returns.作者: Mechanic 时间: 2012-4-2 16:54
Changes in all of the following have been identified as one of the three factors that explain historical Treasury returns EXCEPT the:
A)
curvature of the yield curve.
B)
level of interest rates.
C)
default risk premium.
Default risk is not relevant for Treasury securities. Research has identified the curvature of the yield curve, level of interest rates, and the slope of the yield curve as explaining over 95% of the changes in Treasury returns.作者: Mechanic 时间: 2012-4-2 16:54
Which type of yield shift change explains the largest percentage of variation in total realized bond returns?
A)
Slope changes.
B)
Curvature changes.
C)
Rate changes.
Changes in the level of rates make the greatest contribution, explaining almost 90% of the observed variation in total returns for all maturity levels.作者: Mechanic 时间: 2012-4-2 16:55
Which of the following Treasury issues is typically NOT a candidate used to construct the theoretical spot rate curve?
A)
Treasury principal strips.
B)
Treasury coupon strips.
C)
All Treasury coupon securities and bills.
The following Treasury securities can be used to construct a default-free theoretical spot rate curve:1)
On-the-Run Treasury - the newest Treasury issues of a given maturity:
T-Bills:
zero-coupon securities with 3-month, 6-month, and 1-year maturities.
Treasury Notes:
coupon instruments with 2-year, 5-year, and 10-year maturities.
Treasury Bonds:
coupon instruments with 30-year maturities.
2) On-the-run Treasury issues and selected off-the-run Treasury issues.
3) All Treasury coupon securities and Bills.
4) Treasury coupon strips.作者: Mechanic 时间: 2012-4-2 16:56
To construct a theoretical spot-rate curve using Treasury securities, the class of securities that provides the most accurate prices but has the disadvantage of large maturity gaps is:
A)
strips.
B)
on-the-run securities.
C)
off-the-run securities.
On-the-run securities have the greatest trading volume; therefore, they should be the most accurately priced issues. The Treasury only issues bonds of specified maturities, however, and large gaps exist between the maturities.作者: Mechanic 时间: 2012-4-2 16:56
The swap rate curve is typically based on which interest rate?
A)
The Fed Funds rate.
B)
Treasury bill and bond rates.
C)
LIBOR.
The interest rate paid on negotiable CDs by banks in London is referred to as LIBOR. LIBOR is determined every day by the British Bankers Association. Swap rate curves are typically determined by dollar denominated borrowing based on LIBOR. The Fed Funds rate is the rate paid on interbank loans within the U.S. Treasury bill and bond rates are used for determining the yield curve, but not for the swap rate curve.作者: Mechanic 时间: 2012-4-2 16:56
Which of the following is NOT a reason why market participants prefer the swap rate curve over a government bond yield curve? The swap market:
A)
reflects sovereign credit risk.
B)
it is not affected by technical factors.
C)
is free of government regulation.
Swap rate curves are typically determined by dollar denominated borrowing based on LIBOR. These rates are determined by market participants and are not regulated by governments. Swap rate curves are not affected by technical market factors that affect the yields on government bonds. The swap rate curve is also not subject to sovereign credit risk (potential government default on debt) that is unique to each country.作者: Mechanic 时间: 2012-4-2 16:57
Compared to a yield curve based on government bonds, swap rate curves are:
A)
more comparable across countries and have a greater number of yields at various maturities.
B)
less comparable across countries and have a greater number of yields at various maturities.
C)
more comparable across countries and have a smaller number of yields at various maturities.
Swap rate curves are typically determined by dollar denominated borrowing based on LIBOR. These rates are determined by market participants and are not regulated by governments. Swap rate curves are not affected by technical market factors that affect the yields on government bonds. Swap rate curves are also not subject to sovereign credit risk (potential government default on debt) that is unique to government debt in each country. Thus swap rate curves are more comparable across countries because they reflect similar levels of credit risk. There is also a wider variety of maturities available for swap rate curves, relative to a yield curve based on US Treasury securities, which has only four on-the-run maturities of two years or more. Swap rate curves typically have 11 quotes for maturities between 2 and 30 years.作者: Mechanic 时间: 2012-4-2 16:57
There has been an increasing trend to measuring corporate credit spreads relative to which of the following security classes?
A)
Mortgage-backed securities.
B)
Swaps.
C)
Treasury securities.
Due to the size and extensive use of the swap market there has been a shift from corporate credit spreads based on Treasuries to credit spreads linked to swaps.作者: Mechanic 时间: 2012-4-2 16:58
Which of the following most accurately explains the "locked-in-rate" interpretation of forward rates? The forward rate allows an investor to lock in:
A)
a coupon rate for some future period.
B)
an interest rate for some future period.
C)
a coupon rate for the current period.
The pure expectations theory can be explained using a “locked-in-rate” line of reasoning, whereby forward rates are interpreted as the rate that can be “locked in” for some future period. 作者: Mechanic 时间: 2012-4-2 16:58
According to the liquidity theory, how are forward rates interpreted? Forward rates are:
A)
equal to futures rates.
B)
expected future spot rate plus a rate exposure premium.
C)
expected future spot rates.
The liquidity theory of the term structure proposes that forward rates reflect investors’ expectations of future rates plus a liquidity premium to compensate them for exposure to interest rate risk, and this liquidity premium is positively related to maturity. The implication of the liquidity theory is that forward rates are a biased estimate of the market’s expectation of future rates, since they include a liquidity premium.作者: Mechanic 时间: 2012-4-2 16:59
According to the pure expectations theory, how are forward rates interpreted? Forward rates are:
A)
expected future spot rates.
B)
expected future spot rates if the risk premium is equal to zero.
C)
equal to futures rates.
The pure expectations theory, also referred to as the unbiased expectations theory, purports that forward rates are solely a function of expected future spot rates. This implies that long-term interest rates represent the geometric mean of future expected short-term rates, nothing more.作者: Mechanic 时间: 2012-4-2 16:59
Assuming the pure expectations theory is correct, an upward sloping yield curve implies:
A)
longer-term bonds are riskier than short-term bonds.
B)
interest rates are expected to increase in the future.
C)
interest rates are expected to decline in the future.
The yield curve slopes upward because short-term rates are lower than long-term rates. Since market rates are determined by supply and demand, it follows that investors (demand side) expect rates to be higher in the future than in the near-term. 作者: Mechanic 时间: 2012-4-2 16:59
Which theory explains the shape of the yield curve by considering the relative demands for various maturities?
A)
The liquidity premium theory.
B)
The segmentation theory.
C)
The pure expectations theory.
The market segmentation theory contends that lenders and borrowers have preferred maturity ranges, and that supply and demand forces in each maturity range determines yields. This theory relies on the idea that some investors have restrictions (either legal or practical) on their preferred maturity structure and that they are unwilling or unable to move out of their preferred ranges.作者: Mechanic 时间: 2012-4-2 17:00
The liquidity theory of the term structure of interest rates is a variation of the pure expectations theory that explains why:
A)
duration is an imprecise measure.
B)
the yield curve usually slopes downward.
C)
the yield curve usually slopes upward.
The pure expectations hypothesis says that the shape of the yield curve only reflects expectations of future short-term rates. Yet, the yield curve generally slopes upward. The liquidity theory says that the yield curve incorporates expectations of short-term rates; however, the tendency for the yield curve to slope upward reflects the demand for a higher return to compensate investors for the extra interest rate risk associated with bonds with longer maturities.作者: Mechanic 时间: 2012-4-2 17:00
Which of the following most accurately explains the "break-even-rate" interpretation of forward rates? The forward rate is the rate that will make an investor indifferent between investing:
A)
investing at the spot or forward interest rate.
B)
for the full investment horizon, or for part of it, and then rolling over the proceeds for the balance of the investment horizon at the forward rate.
C)
now or at a forward time.
The pure expectations theory can be explained using a “break-even rate” line of reasoning. The break even rate is the forward rate that leaves investors indifferent between investing for the full term of their investment horizon or investing in part of the horizon and rolling the investment over at the “break-even” forward rate for the remainder of the term.作者: Mechanic 时间: 2012-4-2 17:00
A portfolio manager who believed in the liquidity premium theory would expect:
A)
long-term securities to offer higher returns than short-term securities.
B)
long-term rates to be higher than investors’ expectations of future rates, because of the liquidity premium.
C)
all of the choices are correct.
The liquidity theory of the term structure proposes that forward rates reflect investors’ expectations of future rates plus a liquidity premium to compensate them for exposure to interest rate risk, and this liquidity premium is positively related to maturity. The implication of the liquidity theory is that forward rates, since they include a liquidity premium, are a biased estimate of the market’s expectation of future spot rates.作者: Mechanic 时间: 2012-4-2 17:01
If the liquidity preference hypothesis is true, what shape should the term structure curve have in a period where interest rates are expected to be constant?
A)
Downward sweeping.
B)
Flat.
C)
Upward sweeping.
The liquidity theory holds that investors demand a premium to compensate them for interest rate exposure and the premium increases with maturity. Add this premium to a flat curve and the result is an upward sloping yield curve.作者: Mechanic 时间: 2012-4-2 17:01
According to the pure expectations theory, which of the following statements is most accurate? Forward rates:
A)
exclusively represent expected future spot rates.
B)
are biased estimates of market expectations.
C)
always overestimate future spot rates.
The pure expectations theory, also referred to as the unbiased expectations theory, purports that forward rates are solely a function of expected future spot rates. Under the pure expectations theory, a yield curve that is upward (downward) sloping, means that short-term rates are expected to rise (fall). A flat yield curve implies that the market expects short-term rates to remain constant.作者: spartan1 时间: 2012-4-2 17:02
What are the implications for the shape of the yield curve according to the liquidity theory? The yield curve:
A)
must be upward sloping.
B)
is always flat.
C)
may have any shape.
The liquidity theory holds that investors demand a premium to compensate them to interest rate exposure and the premium increases with maturity. Even after adding the premium to a steep downward sloping yield curve the result will still be downward sloping.作者: spartan1 时间: 2012-4-2 17:03
The liquidity premium theory of the term structure of interest rates projects that the normal shape of the yield curve will be:
A)
upward sloping.
B)
variable.
C)
downward sloping.
The liquidity theory holds that investors demand a premium to compensate them to interest rate exposure and the premium increases with maturity. By itself, the liquidity theory implies an upward sloping yield curve.作者: spartan1 时间: 2012-4-2 17:03
What adjustment must be made to the key rate durations to measure the risk of a steepening of an already upward sloping yield curve?
A)
Increase all key rates by the same amount.
B)
Increase the key rates at the short end of the yield curve.
C)
Decrease the key rates at the short end of the yield curve.
Decreasing the key rates at the short end of the yield curve makes an upward sloping yield curve steeper. Performing the corresponding change in portfolio value will determine the risk of a steepening yield curve.作者: spartan1 时间: 2012-4-2 17:04
Which of the following best describes key rate duration? Key rate duration is determined by:
A)
changing the curvature of the entire yield curve.
B)
changing the yield of a specific maturity.
C)
shifting the whole yield curve in a parallel manner.
Key rate duration can be defined as the approximate percentage change in the value of a bond or bond portfolio in response to a 100 basis point change in a key rate, holding all other rates constant, where every security or portfolio has a set of key rate durations, one for each key rate maturity point.作者: spartan1 时间: 2012-4-2 17:04
Which of the following is closest to the annualized yield volatility (250 trading days per year) if the daily yield volatility is equal to 0.45%?
Suppose that the sample mean of 25 daily yield changes is 0.08%, and the sum of the squared deviations from the mean is 9.6464. Which of the following is the closest to the daily yield volatility?
A)
0.6340%.
B)
0.4019%.
C)
0.3859%.
Daily yield volatility is the standard deviation of the daily yield changes. The variance is obtained by dividing the sum of the squared deviations by the number of observations minus one. Therefore, we have:
Variance = 9.6464/(25 – 1) = 0.4019
Standard deviation = yield volatility = (0.4019)½ = 0.6340%作者: spartan1 时间: 2012-4-2 17:05
Which of the following is closest to the annualized yield volatility (250 trading days per year) if the daily yield volatility is equal to 0.6754%?
For a given three-day period, the interest rates are 4.0%, 4.1%, and 4.0%. What is the yield volatility over this period?
A)
0.0349.
B)
0.0577.
C)
0.0000.
The yield volatility is the standard deviation of the natural logarithms of the two ratios (4.1/4.0) and (4.0/4.1) which are 0.0247 and –0.0247 respectively. Since the mean of these two numbers is zero, the standard deviation is simply {[(0.0247)2 +(-0.0247)2]/(2-1)}0.5=0.0349.作者: spartan1 时间: 2012-4-2 17:07
Which of the following is the most important consideration in determining the number of observations to use to estimate the yield volatility?
A)
The liquidity of the underlying instrument.
B)
The shape of the yield curve.
C)
The appropriate time horizon.
The appropriate number of days depends on the investment horizon of the user of the volatility measurement, e.g., day traders versus pension fund managers.作者: spartan1 时间: 2012-4-2 17:07
Which of the following is a major consideration when the daily yield volatility is annualized?
A)
The appropriate time horizon.
B)
The shape of the yield curve.
C)
The appropriate day multiple to use for a year.
Typically, the number of trading days per year is used, i.e., 250 days.作者: spartan1 时间: 2012-4-2 17:08
Yield volatility has been observed to follow patterns over time. One class of statistical techniques used to forecast those patterns is called:
A)
autoregressive capital hedging models.
B)
autoregressive heteroskedasticity models.
C)
absolute regression chart highlight models.
Autoregressive heteroskedasticity (ARCH) models incorporate past patterns of yield volatilities to forecast future patterns.作者: spartan1 时间: 2012-4-2 17:08
Which of the following is the most appropriate model when we assume that volatility today depends only upon recent prior volatility?
A)
A time weighted historical volatility model.
B)
An implied volatility model.
C)
An autoregressive conditional heteroskedasticity (ARCH) model.
ARCH is commonly used with econometric forecasting techniques.作者: spartan1 时间: 2012-4-2 17:08
Suppose that market participants give the most importance to the most recent movements in yield. Which of the following best describes how the historical yield estimate should be adjusted?
A)
Use only the most recent observations.
B)
Give increased weight to the most recent observations.
C)
Give increased weight to the implied volatility measure.
In this way the forecasted volatility reacts faster to a recent major market movement.作者: spartan1 时间: 2012-4-2 17:09
To estimate yield volatility, an analyst may use historical yields or an implied yield volatility calculated from current market conditions. Identify the pair of terms below that correctly matches a key ingredient in each estimation process with the process itself.
A)
Historical yield volatility: The standard deviation formula. Implied yield volatility: Derivative prices.
B)
Historical yield volatility: Duration. Implied yield volatility: A series of log ratios of daily rates.
C)
Historical yield volatility: Derivative prices. Implied yield volatility: The standard deviation formula.
The historical yield volatility method uses the standard deviation formula. The implied yield volatility method uses derivative prices. In the latter method, the current derivative prices are entered into a formula along with other observed variables. The series of log ratios of daily rates is associated with the historical yield volatility. Duration is not directly relevant.作者: spartan1 时间: 2012-4-2 17:09
Which of the following is the most questionable assumption associated with the implied yield volatility metric? Implied yield volatility assumes:
A)
that the bond pricing model used is correct.
B)
that the option pricing model used is correct.
C)
that the yield curve is flat.
If the observed price of an option is assumed to be the fair price and the option pricing model is assumed to be the model that would generate the fair price, then the implied volatility is the yield volatility that, as an input to the option pricing model, would produce the observed option price.作者: spartan1 时间: 2012-4-2 17:10
Which of the following is NOT an accepted method for forecasting yield volatility? Using:
A)
the simple average of recent squared daily yield changes.
B)
the absolute difference between the spot and forward rate.
C)
the standard deviation of recent daily yield changes.
To forecast yield volatility, an analyst should compute a recent standard deviation of yield changes. It is acceptable to assume the mean yield change is zero and use the average of recent squared rate changes. This can be a simple average or a weighted average where the more recent squared changes are weighted more heavily.
= 7.12%.