Question 1

When expectations theory is combined with the liquidity theory, the yield on a security will always be equal to the yield from consecutive investments in shorter-term securities over the same investment horizon.

Accepted Answer

Expectations theory suggests that long-term interest rates reflect expected future short-term rates, while liquidity theory adds that investors demand a premium for longer-term securities due to their higher risk and lower liquidity. Therefore, the yield on a long-term security may not always equal the yield from consecutive investments in shorter-term securities, as it could be higher due to the liquidity premium.

Question 2

Which of the following is not a characteristic affecting the yields on debt securities?
A)default risk
B)liquidity
C)tax status
D)term to maturity
E)All of the above affect yields on debt securities.

Accepted Answer

The answer of Which of the following is not a...

Question 3

If the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on longer-term securities, even when they have funds for only a short period of time.This strategy is known as riding the yield curve.

Accepted Answer

Riding the yield curve involves investing in longer-term securities with the goal of benefiting from higher yields, even if the investor only has funds available for a short period of time. This is more likely to occur in an upward sloping yield curve where longer-term securities have higher yields than short-term securities.

Question 4

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ____ pressure on the demand for short-term funds by borrowers and the yield curve will be ____ sloping.
A)upward; downward
B)downward; upward
C)upward; upward
D)downward; downward

Accepted Answer

The answer of According to segmented markets theory, if investors...

Question 5

If interest rates are expected to decrease, the yield on new short-term securities may be expected to ____, and the yield curve should be ____ sloping.
A)increase; upward
B)increase; downward
C)decrease; upward
D)decrease; downward

Accepted Answer

The answer of If interest rates are expected to decrease,...

Question 6

Other things being equal, an expected decrease in interest rates will increase the demand for long-term funds by borrowers.

Accepted Answer

The answer of Other things being equal, an expected decrease...

Question 7

If the Treasury uses a relatively large proportion of ____ debt to finance a budget deficit, this would place ____ pressure on long-term yields.
A)short-term; downward
B)long-term; downward
C)short-term; upward
D)long-term; upward

Accepted Answer

If the Treasury uses a relatively large proportion of long-term debt to finance a budget deficit, this would place upward pressure on long-term yields. This is because investors may demand higher yields to compensate for the increased risk of inflation and potential default over a longer time horizon.

Question 8

The segmented markets theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it.

Accepted Answer

The segmented markets theory suggests that the bond market is divided into segments based on the maturity of the bonds, and investors typically stay within a particular segment and do not wander from it, even in response to certain events.

Question 9

A downward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.
A)longer; lower
B)longer; higher
C)shorter; lower
D)shorter; higher
E)Answers A and D are correct.

Accepted Answer

The answer of A downward-sloping yield curve indicates that Treasury...

Question 10

If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield curve should be
A)flat.
B)downward sloping.
C)upward sloping.
D)none of the above.

Accepted Answer

The liquidity premium theory suggests that investors demand a premium for holding long-term bonds due to the increased risk and uncertainty associated with holding those bonds for a longer period. As a result, the yield on long-term bonds should be higher than the yield on short-term bonds. This means that the yield curve should generally be upward-sloping, with the yield on long-term bonds higher than the yield on short-term bonds. Therefore, the correct answer is choice C, upward sloping.

Question 11

Assume that the Treasury experiences a large increase in the budget deficit and issues a large number of T-bills.This action will ____ the supply of T-bills in the market and place ____ pressure on the yield of T-bills.
A)decrease; downward
B)decrease; upward
C)increase; upward
D)increase; downward

Accepted Answer

When the Treasury issues a large number of T-bills to finance a large increase in the budget deficit, the supply of T-bills in the market increases. This increase in supply puts upward pressure on the yield of T-bills as investors demand higher yields to compensate for the increased supply of T-bills. Therefore, option C is the correct answer.

Question 12

The ____ theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it.
A)pure expectations
B)liquidity premium
C)segmented markets
D)preferred habitat

Accepted Answer

The preferred habitat theory suggests that investors and borrowers may normally concentrate on a particular natural maturity market but can be prompted to move to a different market due to certain factors, such as differences in yield. The other options (pure expectations, liquidity premium, and segmented markets) do not directly relate to the idea of investors and borrowers shifting their focus to different maturity markets.

Question 13

All other characteristics being equal, securities with ____ liquidity would have to offer a ____ yield to be preferred.
A)lower; higher
B)higher; higher
C)lower; lower
D)none of the above

Accepted Answer

Securities with lower liquidity would have to offer a higher yield to be preferred since investors are taking on more risk by investing in a security that may be difficult to sell quickly if needed. Therefore, to compensate for this risk, the security would need to offer a higher yield.

Question 14

Which of the following statements is not true with respect to debt securities?
A)Some types of debt securities always offer a higher yield than others.
B)Debt securities offer different yields because they exhibit different characteristics that influence the offered yield.
C)In general, securities with favorable characteristics will offer higher yields to entice investors.
D)All of the above are true with respect to debt securities.

Accepted Answer

The answer of Which of the following statements is not...

Question 15

Yield curves are always upward sloping.

Accepted Answer

Yield curves can be upward sloping (normal), downward sloping (inverted), or flat (horizontal). The shape of the yield curve is determined by the yields of bonds with different maturities.

Question 16

The preference for more liquid short-term securities places downward pressure on the slope of the yield curve.

Accepted Answer

The answer of The preference for more liquid short-term securities...

Quiz 3: Structure of Interest Rates

When expectations theory is combined with the liquidity theory, the yield on a security will always be equal to the yield from consecutive investments in shorter-term securities over the same investment horizon.

Which of the following is not a characteristic affecting the yields on debt securities?

If the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on longer-term securities, even when they have funds for only a short period of time.This strategy is known as riding the yield curve.

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place pressure on the demand for short-term funds by borrowers and the yield curve will be sloping.

If interest rates are expected to decrease, the yield on new short-term securities may be expected to , and the yield curve should be sloping.

Other things being equal, an expected decrease in interest rates will increase the demand for long-term funds by borrowers.

If the Treasury uses a relatively large proportion of debt to finance a budget deficit, this would place pressure on long-term yields.

The segmented markets theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it.

A downward-sloping yield curve indicates that Treasury securities with maturities offer annualized yields.

If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield curve should be

Assume that the Treasury experiences a large increase in the budget deficit and issues a large number of T-bills.This action will the supply of T-bills in the market and place pressure on the yield of T-bills.

The ____ theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it.

All other characteristics being equal, securities with liquidity would have to offer a yield to be preferred.

Which of the following statements is not true with respect to debt securities?

Yield curves are always upward sloping.

The preference for more liquid short-term securities places downward pressure on the slope of the yield curve.