Q10. 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 decline in the future.

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

Q11. Using the data in Table 1, what is the one year implied forward rate under the pure expectations theory?

A)   5.72%.

B)   6.39%.

C)   6.07%.

Q12. Which of the following statements regarding the preferred habitat theory is least accurate?

A)   The preferred habitat theory can be used to explain almost any shape of the yield curve.

B)   The risk premium is a positive or negative risk premium related to supply and demand for funds at various maturities.

C)   Falling short term interest rates are indicated by a downward sloping yield curve.

Q13. Which of the following most accurately explains an upward sloping yield curve according to the liquidity preference theory of the term structure of interest rates?

A)   There is greater demand for short-term securities than for long-term securities.

B)   There is a risk premium associated with more distant maturities.

C)   The market expects short-term rates to rise through the relevant future.

Q14. Which of the following most accurately explains an upward sloping yield curve according to the (unbiased) pure expectations theory of the term structure of interest rates?

A)   The market expects short-term rates to rise through the relevant future.

B)   The market expects a risk premium for more distant maturities.

C)   There is greater demand for long-term securities than for short-term securities.

Q15.Which theory explains the shape of the yield curve by considering the relative demands for various maturities?

A)   The segmentation theory.

B)   The liquidity premium theory.

C)   The pure expectations theory.

Q16. The liquidity theory of the term structure of interest rates is a variation of the pure expectations theory that explains why:

A)   the yield curve usually slopes upward.

B)   duration is an imprecise measure.

C)   the yield curve usually slopes downward.

Q17. 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)   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.

B)   investing at the spot or forward interest rate.

C)   now or at a forward time.

Q18. 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.

Q19. 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)   Upward sweeping.

C)   Flat.

Q20. Which of the following is TRUE according to the pure expectations theory? Forward rates:

A)   exclusively represent expected future spot rates.

B)   are biased estimates of market expectations.

C)   always overestimate future spot rates.

Q21. What are the implications for the shape of the yield curve according to the liquidity theory? The yield curve:

A)   may have any shape.

B)   must be upward sloping.

C)   is always flat.

Q22. The liquidity premium theory of the term structure of interest rates projects that the normal shape of the yield curve will be:

A)   variable.

B)   downward sloping.

C)   upward sloping.

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