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LOS c, (Part 1): Explain the basic theories of the term structure of interest rates.
Q1. The term structure theory that rests on the interaction of supply and demand forces in the debt market is the:
A) expectation hypothesis.
B) GIC inverse term structure theory.
C) market segmentation theory.
Q2. Which of the following statements regarding the different theories of the term structure of interest rates is least accurate?
A) The market segmentation theory, pure expectations theory, preferred habitat theory, and liquidity preference theory are all consistent with any shape of the yield curve.
B) The preferred habitat theory suggests that investors prefer to stay within a particular maturity range of the yield curve regardless of yields in other maturity ranges.
C) An upward sloping yield curve can be consistent with the liquidity preference theory even with expectations of declining short term interest rates.
Q3. Which of the following is a correct interpretation of forward rates under the pure expectations hypothesis? Forward rates are equal to the expected future:
A) rate differences between short and long-term bonds.
B) spot rates.
C) risk premiums on short-term bills.
Correct answer is B)
The pure expectations theory purports that forward rates are solely a function of expected future spot rates.
Q4. An analyst forecasts that spot interest rates will increase more than the increase implied by the current forward interest rates. Under these circumstances:
A) the analyst should establish a bullish bond portfolio.
B) the analyst should establish a bearish bond portfolio.
C) all bond positions earn the same return.
Q5. The liquidity preference theory holds that:
A) the yield curve should be upward-sloping.
B) because they are so marketable, there is a liquidity premium that normally has to be paid to invest in short-term debt securities.
C) cash should be preferred to Treasury securities because it is more liquid.
Q6. According to the expectations hypothesis, investors’ expectations of decreasing inflation will result in:
A) a downward-sloping yield curve.
B) a flat yield curve.
C) an upward-sloping yield curve.
Q7. Suppose that the one-year forward rate starting one year from now is 6%. Which of the following statements is most accurate under the pure expectations hypothesis? The expected:
A) future risk premium for short-term bills is 6%.
B) future one-year spot rate in one year's time is equal to 6%.
C) one-year forward rate in one year's time is equal to 6%.
Q8. According to the pure expectations theory an upward-sloping yield curve implies:
A) longer-term bonds are riskier than short-term bonds.
B) interest rates are expected to decline in the future.
C) interest rates are expected to increase in the future.
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发表于 2009-3-2 17:03
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