Question 1

Answer the following questions that relate to bonds.
A 2-year zero-coupon bond is selling for $890.00.What is the yield to maturity of this bond
The price of a 1-year zero-coupon bond is $931.97.What is the yield to maturity of this bond
Calculate the forward rate for the second year.
How can you construct a synthetic one-year forward loan (you are agreeing now to loan in one year)
 State the strategy and show the corresponding cash flows.Assume that you can purchase and sell fractional portions of bonds.Show all calculations and discuss the meaning of the transactions.

Accepted Answer

Calculations are shown in the table belo...

Question 2

If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows)  you could

Accepted Answer

A)  profit by buying the stripped cash flows and reconstituting the bond.
B)  not profit by buying the stripped cash flows and reconstituting the bond.
C)  profit by buying the bond and creating STRIPS.
D)  not profit by buying the stripped cash flows and reconstituting the bond and profit by buying the bond and creating STRIPS.
E)  None of the optionsF) B) and D)
G) None of the above

Question 3

Suppose that all investors expect that interest rates for the 4 years will be as follows:  What is the yield to maturity of a 3-year zero-coupon bond

Accepted Answer

A)  7.00%
B)  9.00%
C)  6.99%
D)  4.00%
E)  None of the optionsF) C) and D)
G) B) and E)

Question 4

According to the expectations hypothesis, an upward sloping yield curve implies that

Accepted Answer

A)  interest rates are expected to remain stable in the future.
B)  interest rates are expected to decline in the future.
C)  interest rates are expected to increase in the future.
D)  interest rates are expected to decline first, then increase.
E)  interest rates are expected to increase first, then decrease.F) A) and B)
G) A) and C)

Question 5

An inverted yield curve is one

Accepted Answer

A)  with a hump in the middle.
B)  constructed by using convertible bonds.
C)  that is relatively flat.
D)  that plots the inverse relationship between bond prices and bond yields.
E)  that slopes downward.F) A) and B)
G) C) and D)

Question 6

Although the expectations of increases in future interest rates can result in an upward sloping yield curve; an upward sloping yield curve does not in and of itself imply the expectations of higher future interest rates.Explain.

Accepted Answer

The effects of possible liquidity premiu...

Question 7

The following is a list of prices for zero-coupon bonds with different maturities and par value of $1,000.  What is the yield to maturity on a 3-year zero-coupon bond

Accepted Answer

A)  6.37%
B)  9.00%
C)  7.33%
D)  8.24%E) C) and D)
F) B) and D)

Question 8

Given the yield on a 3-year zero-coupon bond is 7% and forward rates of 6% in year 1 and 6.5% in year 2, what must be the forward rate in year 3

Accepted Answer

A)  7.2%
B)  8.6%
C)  8.5%
D)  6.9%E) A) and B)
F) A) and C)

Question 9

Suppose that all investors expect that interest rates for the 4 years will be as follows:  What is the price of 3-year zero-coupon bond with a par value of $1,000

Accepted Answer

A)  $863.83
B)  $816.58
C)  $772.18
D)  $765.55
E)  None of the optionsF) D) and E)
G) A) and B)

Question 10

The following is a list of prices for zero-coupon bonds with different maturities and par value of $1,000.  What is the yield to maturity on a 3-year zero-coupon bond

Accepted Answer

A)  6.37%
B)  9.00%
C)  7.33%
D)  10.00%
E)  None of the optionsF) All of the above
G) B) and C)

Question 11

The yield curve shows at any point in tim

Accepted Answer

A)  the relationship between the yield on a bond and the duration of the bond.
B)  the relationship between the coupon rate on a bond and time to maturity of the bond.
C)  the relationship between yield on a bond and the time to maturity on the bond.
D)  All of the options
E)  None of the optionsF) All of the above
G) A) and E)

Question 12

The following is a list of prices for zero-coupon bonds with different maturities and par value of $1,000.  You have purchased a 4-year maturity bond with a 9% coupon rate paid annually.The bond has a par value of $1,000.What would the price of the bond be one year from now if the implied forward rates stay the same

Accepted Answer

A)  $995.63
B)  $1,108.88
C)  $1,000.00
D)  $1,042.78E) B) and C)
F) A) and B)

Question 13

Given the yield on a 3 year zero-coupon bond is 7.2% and forward rates of 6.1% in year 1 and 6.9% in year 2, what must be the forward rate in year 3

Accepted Answer

A)  8.4%
B)  8.6%
C)  8.1%
D)  8.9%
E)  None of the optionsF) C) and E)
G) A) and C)

Question 14

Suppose that all investors expect that interest rates for the 4 years will be as follows:  What is the yield to maturity of a 3-year zero-coupon bond

Accepted Answer

A)  7.03%
B)  9.00%
C)  6.99%
D)  7.49%
E)  None of the optionsF) C) and D)
G) All of the above

Question 15

Forward rates ____________ future short rates because ____________.

Accepted Answer

A)  are equal to; they are both extracted from yields to maturity
B)  are equal to; they are perfect forecasts
C)  differ from; they are imperfect forecasts
D)  differ from; forward rates are estimated from dealer quotes while future short rates are extracted from yields to maturity
E)  are equal to; although they are estimated from different sources they both are used by traders to make purchase decisionsF) B) and C)
G) A) and E)

Question 16

Suppose that all investors expect that interest rates for the 4 years will be as follows:  What is the price of a 2-year maturity bond with a 10% coupon rate paid annually (Par value = $1,000)

Accepted Answer

A)  $1,092
B)  $1,054
C)  $1,000
D)  $1,073
E)  None of the optionsF) C) and D)
G) A) and B)

Question 17

Suppose that all investors expect that interest rates for the 4 years will be as follows:  If you have just purchased a 4-year zero-coupon bond, what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same (Par value of the bond = $1,000.)

Accepted Answer

A)  5%
B)  3%
C)  9%
D)  10%
E)  None of the optionsF) C) and D)
G) A) and E)

Question 18

Which of the following is not proposed as an explanation for the term structure of interest rates

Accepted Answer

A)  The expectations theory
B)  The liquidity preference theory
C)  The safety of principal theory
D)  Modern portfolio theory
E)  The expectations theory and the liquidity preference theoryF) A) and B)
G) B) and E)

Question 19

Treasury STRIPS are

Accepted Answer

A)  securities issued by the Treasury with very long maturities.
B)  extremely risky securities.
C)  created by selling each coupon or principal payment from a whole Treasury bond as a separate cash flow.
D)  created by pooling mortgage payments made to the Treasury.E) All of the above
F) B) and C)

Question 20

An upward sloping yield curve

Accepted Answer

A)  may be an indication that interest rates are expected to increase.
B)  may incorporate a liquidity premium.
C)  may reflect the confounding of the liquidity premium with interest rate expectations.
D)  All of the options
E)  None of the optionsF) None of the above
G) C) and D)

Exam 15: The Term Structure of Interest Rates

An upward sloping yield curve

Correct Answer
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Given the yield on a 3 year zero-coupon bond is 7.2% and forward rates of 6.1% in year 1 and 6.9% in year 2, what must be the forward rate in year 3

Correct Answer
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The yield curve shows at any point in tim

Correct Answer
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Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the yield to maturity of a 3-year zero-coupon bond

Correct Answer
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Forward rates future short rates because .

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Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the price of 3-year zero-coupon bond with a par value of $1,000

Correct Answer
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The following is a list of prices for zero-coupon bonds with different maturities and par value of $1,000. What is the yield to maturity on a 3-year zero-coupon bond

Correct Answer
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Treasury STRIPS are

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Given the yield on a 3-year zero-coupon bond is 7% and forward rates of 6% in year 1 and 6.5% in year 2, what must be the forward rate in year 3

Correct Answer
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If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows) you could

Correct Answer
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Correct Answer
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Calculations are shown in the table belo...
View Answer

Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the yield to maturity of a 3-year zero-coupon bond

Correct Answer
verified

According to the expectations hypothesis, an upward sloping yield curve implies that

Correct Answer
verified

Correct Answer
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Suppose that all investors expect that interest rates for the 4 years will be as follows: If you have just purchased a 4-year zero-coupon bond, what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same (Par value of the bond = $1,000.)

Correct Answer
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The following is a list of prices for zero-coupon bonds with different maturities and par value of $1,000. What is the yield to maturity on a 3-year zero-coupon bond

Correct Answer
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Although the expectations of increases in future interest rates can result in an upward sloping yield curve; an upward sloping yield curve does not in and of itself imply the expectations of higher future interest rates.Explain.

Correct Answer
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The effects of possible liquidity premiu...
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Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the price of a 2-year maturity bond with a 10% coupon rate paid annually (Par value = $1,000)

Correct Answer
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An inverted yield curve is one

Correct Answer
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Which of the following is not proposed as an explanation for the term structure of interest rates

Correct Answer
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Exam 15: The Term Structure of Interest Rates

An upward sloping yield curve

Correct AnswerverifiedShow Answer

Given the yield on a 3 year zero-coupon bond is 7.2% and forward rates of 6.1% in year 1 and 6.9% in year 2, what must be the forward rate in year 3

Correct AnswerverifiedShow Answer

The yield curve shows at any point in tim

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Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the yield to maturity of a 3-year zero-coupon bond

Correct AnswerverifiedShow Answer

Forward rates ____________ future short rates because ____________.

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Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the price of 3-year zero-coupon bond with a par value of $1,000

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The following is a list of prices for zero-coupon bonds with different maturities and par value of $1,000. What is the yield to maturity on a 3-year zero-coupon bond

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Treasury STRIPS are

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Given the yield on a 3-year zero-coupon bond is 7% and forward rates of 6% in year 1 and 6.5% in year 2, what must be the forward rate in year 3

Correct AnswerverifiedShow Answer

If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows) you could

Correct AnswerverifiedShow Answer

Correct AnswerverifiedCalculations are shown in the table belo...View AnswerShow Answer

Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the yield to maturity of a 3-year zero-coupon bond

Correct AnswerverifiedShow Answer

According to the expectations hypothesis, an upward sloping yield curve implies that

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Suppose that all investors expect that interest rates for the 4 years will be as follows: If you have just purchased a 4-year zero-coupon bond, what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same (Par value of the bond = $1,000.)

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The following is a list of prices for zero-coupon bonds with different maturities and par value of $1,000. What is the yield to maturity on a 3-year zero-coupon bond

Correct AnswerverifiedShow Answer

Although the expectations of increases in future interest rates can result in an upward sloping yield curve; an upward sloping yield curve does not in and of itself imply the expectations of higher future interest rates.Explain.

Correct AnswerverifiedThe effects of possible liquidity premiu...View AnswerShow Answer

Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the price of a 2-year maturity bond with a 10% coupon rate paid annually (Par value = $1,000)

Correct AnswerverifiedShow Answer

An inverted yield curve is one

Correct AnswerverifiedShow Answer

Which of the following is not proposed as an explanation for the term structure of interest rates

Correct AnswerverifiedShow Answer

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Forward rates future short rates because .

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Calculations are shown in the table belo...
View Answer

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The effects of possible liquidity premiu...
View Answer

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