1. The term structure of interest rates is the structure of interest rates on bonds that differ only in terms of

a) purchase price.

b) income risk.

c) term to maturity.

d) liquidity.

 

2. The graphic display of the relationship between the rate of return and the term to maturity is called

a) the yield curve.

b) the supply curve for bonds.

c) the Phillips curve.

d) the demand curve for bonds.

 

3. The yield on a government bond maturing in one year is 6%, and the expected yield on a government bond maturing in one year from today is 8%. According to the expectations hypothesis, the yield on a government bond maturing in two years is:

a) 14%.

b)   2%.

c)   7%.

d)   8%.

 

4. Which of the following is not a theory of the term structure of interest rates?

a) expectations hypothesis

b) permanent income hypothesis

c) liquidity premium theory

d) market segmentation hypothesis

 

5. According to the expectations hypothesis the yield on

a) a short-term bond is an average of the expected yields on long-term bonds.

b) a long-term bond is the average of expected yields on short-term bonds.

c) a short-term bond is the difference between the long-term yield and the inflation rate.

d) a long-term bond is the sum of the short-term yield and the risk premium.

 

6. According to the expectations hypothesis, the expectation of falling short-term interest rates results in

a) a downward-sloping yield curve.

b) an upward-sloping yield curve.

c) a flat (horizontal) yield curve.

d) a hump-shaped yield curve.

 

7. If the real interest rate remains constant, the spread between short-term and long-term yields is equal to

a) changes in expected future inflation rates.

b) the liquidity premium.

c) the difference between long-term and short-term bond prices.

d) changes in the foreign rate of inflation.

 

8. The liquidity premium theory of the term structure of interest rates assumes that 

a) short-term and long-term bonds are perfect substitutes.

b) long-term bonds are relatively less liquid (less marketable) than short-term bonds.

c) short-term bonds are relatively less liquid (less marketable) than long-term bonds.

d) short-term and long-term bonds are perfect complements.

 

9. Through the operation of the Fisher Effect, a permanent increase in the expected rate of inflation

a) shifts the yield curve downward.

b) shifts the yield curve upward.

c) leaves the yield curve unaffected.

d) changes the slope of the yield curve from positive to negative.

 

10. According to the market segmentation hypothesis, short-term and long-term bonds

a) are perfect substitutes.

b) are imperfect substitutes.

c) are not substitutes for each other.

d) are complementary to each other.

    • 9 years ago
    Multiple Choice
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