Fixed Income【Reading 56】Sample discount, without, interest, 2012

Gypsy

If the Federal Reserve wishes to lower market interest rates without changing the discount rate, it can:

A) buy Treasury securities.

B) raise the yield on Treasury securities.

C) increase bank reserve requirements.

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Buying Treasury securities pumps money into the economy, lowering interest rates. Higher reserve requirements will restrict the money supply, causing rates to rise. The Federal Reserve has no direct control over the yield on existing Treasury securities.

Gypsy

Which of the following policy tools is the least likely to be available to the U.S. Federal Reserve Board?

A) Buying and selling Treasury securities in the open market.

B) Setting the discount rate at which banks can borrow from the Federal Reserve.

C) Requiring the banking system to tighten or loosen its credit policies.

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The U.S. Federal Reserve can encourage or persuade banks as a whole to tighten or loosen their credit policies, but it cannot compel them to do so.

Gypsy

Which of the following are the two most important tools available to the Federal Reserve?

A) Changing the discount rate and open market operations.

B) Changing the discount rate and changing bank reserve requirements.

C) Open market operations and changing bank reserve requirements.

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The two most important tools available to the Fed are changing the discount rate, the rate at which banks can borrow from the Fed’s discount window, and open market operations, the Fed’s activity of buying and selling Treasury securities.

Gypsy

The concept of spot and forward rates is most closely associated with which of the following explanations of the term structure of interest rates?

A) Segmented market theory.

B) Expectations hypothesis.

C) Liquidity premium theory.

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The pure expectations theory purports that forward rates are solely a function of expected future spot rates. In other words, long-term interest rates equal the mean of future expected short-term rates. This implies that an investor could earn the same return by investing in a 1-year bond or by sequentially investing in two 6-month bonds. The implications for the shape of the yield curve under the pure expectations theory are:

• If the yield-curve is upward sloping, short-term rates are expected to rise.
• If the curve is downward sloping, short-term rates are expected to fall.
• A flat yield curve implies that the market expects short-term rates to remain constant.

Gypsy

If investors expect future rates will be higher than current rates, the yield curve should be:

A) vertical.

B) downward sweeping.

C) upward sweeping.

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When interest rates are expected to go up in the future the yield curve will be upward sweeping because time is on the x-axis and rates are on the y-axis, thus forming an upward sweeping curve.

Gypsy

A downward sloping yield curve generally implies:

A) interest rates are expected to decline in the future.

B) shorter-term bonds are less risky than longer-term bonds.

C) interest rates are expected to increase in the future.

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Since a yield curve has time on the x-axis and rates on the y-axis, when the yield curve is downward sloping it means that rates are expected to decline.  

Gypsy

Which of the following yield curves represents a situation where long-term rates are less than short-term rates?

A) Normal yield curve.

B) Inverted yield curve.

C) Humped yield curve.

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A normal yield curve is one in which long-term rates are greater than short-term rates. A humped yield curve represents a situation where rates in the middle of the maturity spectrum are higher or lower than those for both bonds with a short and long-term maturity.

Gypsy

Which of the following is the shape of an inverted yield curve or term structure?

A) Downward sloping.

B) Flat.

C) Upward sloping.

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An inverted yield curve reflects the condition where long-term rates are less than short-term rates, giving it a downward (negative) slope.

Gypsy

Which of the following best explains the slope of the yield curve?

A) The term spread between the yields of two maturities.

B) The nominal spread between two securities with different maturities.

C) The credit spread between two securities with different maturities.

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Since the yield curve depicts the yield on securities with different maturities, the slope of the curve between two maturities is a function of the maturity spread.

Gypsy

A normally sloped yield curve has a:

A) zero slope.

B) negative slope.

C) positive slope.

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A normally shaped yield curve is one in which long-term rates are greater than short-term rates, thus the curve exhibits a positive slope.