1.A yield curve undergoes a parallel shift. With respect to the bonds described by the yield curve, the shift has NOT changed the:

A)   yield spreads for bonds of different maturities.

B)   durations.

C)   current yields.

D)   yield to maturities.

2.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)   Long-term bonds become more sensitive to interest rate changes.

C)   The convexity of long-term bonds increases relative to short-term instruments.

D)   The yield spread between long and short-term securities increases.

3.With respect to yield curve, a negative butterfly shift means that the yield curve has become:

A)   flat.

B)   positively sloped for all regions.

C)   negatively sloped for all regions.

D)   more curved.

4.Which of the following is TRUE if there is a twist in the yield curve?

A)   The curvature of the yield curve increases.

B)   The yield curve flattens or steepens.

C)   The curvature of the yield curve decreases.

D)   The yield curve becomes humped at intermediate maturities.

5.Which of the following is TRUE if there is a positive butterfly shift in the yield curve?

A)   The curvature of the yield curve decreases.

B)   The yield curve flattens or steepens.

C)   The curvature of the yield curve increases.

D)   The yield curve becomes less humped at intermediate maturities.

1.A yield curve undergoes a parallel shift. With respect to the bonds described by the yield curve, the shift has NOT changed the:

A)   yield spreads for bonds of different maturities.

B)   durations.

C)   current yields.

D)   yield to maturities.

The correct answer was A)

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. A parallel shift in the yield curve means that all yields have changed, and that would change current yields of the bonds.

2.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)   Long-term bonds become more sensitive to interest rate changes.

C)   The convexity of long-term bonds increases relative to short-term instruments.

D)   The yield spread between long and short-term securities increases.

The correct answer was D)

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.

3.With respect to yield curve, a negative butterfly shift means that the yield curve has become:

A)   flat.

B)   positively sloped for all regions.

C)   negatively sloped for all regions.

D)   more curved.

The correct answer was D)

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.

4.Which of the following is TRUE if there is a twist in the yield curve?

A)   The curvature of the yield curve increases.

B)   The yield curve flattens or steepens.

C)   The curvature of the yield curve decreases.

D)   The yield curve becomes humped at intermediate maturities.

The correct answer was B)

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).

5.Which of the following is TRUE if there is a positive butterfly shift in the yield curve?

A)   The curvature of the yield curve decreases.

B)   The yield curve flattens or steepens.

C)   The curvature of the yield curve increases.

D)   The yield curve becomes less humped at intermediate maturities.

The correct answer was A)

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.