Exam 6: Interest Rates

A) 0.17%
B) 0.20%
C) 0.24%
D) 0.19%
E) 0.22%

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A) The yield on a 3-year Treasury bond cannot exceed the yield on a 10-year Treasury bond.
B) The real risk-free rate is higher for corporate than for Treasury bonds.
C) Most evidence suggests that the maturity risk premium is zero.
D) Liquidity premiums are higher for Treasury than for corporate bonds.
E) The pure expectations theory states that the maturity risk premium for long-term Treasury bonds is zero and that differences in interest rates across different Treasury maturities are driven by expectations about future interest rates.

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A) The yield on a 3-year Treasury bond cannot exceed the yield on a 10-year Treasury bond.
B) The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond.
C) The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond.
D) The yield on a 10-year AAA-rated corporate bond should always exceed the yield on a 5-year AAA-rated corporate bond.
E) The following represents a "possibly reasonable" formula for the maturity risk premium on bonds: MRP = -0.1%(t) ,where t is the years to maturity.

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A) Prices and interest rates would both rise.
B) Prices would rise and interest rates would decline.
C) Prices and interest rates would both decline.
D) Prices would decline and interest rates would rise.
E) There is no reason to expect a change in either prices or interest rates.

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A) If companies have fewer good investment opportunities,interest rates are likely to increase.
B) If individuals increase their savings rate,interest rates are likely to increase.
C) If expected inflation increases,interest rates are likely to increase.
D) Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy,hence the riskiness of all debt securities.
E) Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.

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A) 3.64%
B) 3.48%
C) 3.00%
D) 4.96%
E) 4.00%

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A) An upward-sloping yield curve would imply that interest rates are expected to be lower in the future.
B) If a 1-year Treasury bill has a yield to maturity of 7% and a 2-year Treasury bill has a yield to maturity of 8%,this would imply the market believes that 1-year rates will be 7.5% one year from now.
C) The yield on a 5-year corporate bond should always exceed the yield on a 3-year Treasury bond.
D) Interest rate (price) risk is higher on long-term bonds,but reinvestment rate risk is higher on short-term bonds.
E) Interest rate (price) risk is higher on short-term bonds,but reinvestment rate risk is higher on long-term bonds.

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A) Since the pure expectations theory holds,the 10-year corporate bond must have the same yield as the 5-year corporate bond.
B) Since the pure expectations theory holds,all 5-year Treasury bonds must have higher yields than all 10-year Treasury bonds.
C) Since the pure expectations theory holds,all 10-year corporate bonds must have the same yield as 10-year Treasury bonds.
D) The 10-year Treasury bond must have a higher yield than the 5-year corporate bond.
E) The 10-year corporate bond must have a higher yield than the 5-year corporate bond.

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A) 0.82%
B) 1.15%
C) 0.97%
D) 0.85%
E) 1.00%

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A) 1.22%
B) 1.10%
C) 1.34%
D) 0.86%
E) 1.20%

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A) The yield curve for U.S.Treasury securities will be upward sloping.
B) A 5-year corporate bond must have a lower yield than a 5-year Treasury security.
C) A 5-year corporate bond must have a lower yield than a 7-year Treasury security.
D) The real risk-free rate cannot be constant if inflation is not expected to remain constant.
E) This problem assumed a zero maturity risk premium,but that is probably not valid in the real world.

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A) If the maturity risk premium (MRP) is greater than zero,the Treasury bond yield curve must be upward sloping.
B) If the maturity risk premium (MRP) equals zero,the Treasury bond yield curve must be flat.
C) If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero,the Treasury bond yield curve must be upward sloping.
D) If the expectations theory holds,the Treasury bond yield curve will never be downward sloping.
E) Because long-term bonds are riskier than short-term bonds,yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds.

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