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Student: ___________________________________________________________________________ 1. Bond stripping and bond reconstitution offer opportunities for ______, which can occur if the _________ is violated. A. arbitrage; Law of One Price B. arbitrage; restrictive covenants C. huge losses; Law of One Price D. huge losses; restrictive covenants E. B and D

2. According to the "liquidity preference" theory of the term structure of interest rates, the yield curve usually should be: A. inverted. B. normal. C. upward sloping D. A and B. E. B and C.

Suppose that all investors expect that interest rates for the 4 years will be as follows:

3. What is the price of 3-year zero coupon bond with a par value of $1,000? A. $889.08 B. $816.58 C. $772.18 D. $765.55 E. none of the above

1

a plot of yield as a function of maturity for zero-coupon bonds. E. D. B. forward rates exceed the expected future interest rates.32 2 . The expectations theory of the term structure of interest rates states that A. The relationship between the interest rate on a security and its time to maturity. a plot of yield as a function of maturity for recently issued coupon bonds trading at or near par. A and B. What should the purchase price of a 4-year zero coupon bond be if it is purchased today and has face value of $1.4. $866. $856.and short-maturity bonds are determined by the supply and demand for the securities. a plot of yield as a function of maturity for corporate bonds with different risk ratings. forward rates are determined by investors' expectations of future interest rates. B.000? A. D. 7. D. B. C.15 C. The term structure of interest rates is: A. The relationship between the yield on a bond and its default rate. none of the above. The relationship between the rates of interest on all securities. yields on long. a plot of liquidity premiums for different maturities. all of the above. $821. C.54 D. C. E. All of the above. 6.42 B.02 E. 5. E. None of the above. The on the run yield curve is A. $887. $879.

$1. 9.00% D. decreasing expected short rates and increasing liquidity premiums C. increasing expected short rates and increasing liquidity premiums B. A.119 3 .33% C. 7. $1. $1.19% E. What is. $1. 9. Calculate the price at the beginning of year 1 of a 10% annual coupon bond with face value $1.179 D.132 C.00% B. $1. the expected forward rate in the third year? A. none of the above 10.150 E.105 B. 7. Which of the following combinations will result in a sharply increasing yield curve? A.000.000 and 5 years to maturity. according to the expectations theory. 11. constant expected short rates and increasing liquidity premiums The following is a list of prices for zero coupon bonds with different maturities and par value of $1. increasing expected short rates and constant liquidity premiums E. increasing expected short rates and decreasing liquidity premiums D.8.

I. I and II B. Liquidity preference theory. although they are estimated from different sources they both are used by traders to make purchase decisions. are equal to. forward rates are estimated from dealer quotes while future short rates are extracted from yields to maturity. are equal to. D. E. and IV 12. C. A. C. B. III. and C. The expectations theory. I. they are perfect forecasts. are equal to.11. I and III C. The liquidity preference theory. Investors can use publicly available financial date to determine which of the following? I) the shape of the yield curve II) future short-term rates III) the direction the Dow indexes are heading IV) the actions to be taken by the Federal Reserve A. The market segmentation theory. Forward rates ____________ future short rates because ____________. and IV E. E. 13. differ from. they are imperfect forecasts. differ from. C. 14. III. A. B. 4 . they are both extracted from yields to maturity. Which of the following is not proposed as an explanation for the term structure of interest rates: A. II. None of the above. II. Modern portfolio theory. B. D. Which of the following theories state that the shape of the yield curve is essentially determined by the supply and demands for long-and short-maturity bonds? A. E. D. All of the above. I. and III D. B. Market segmentation theory. Expectations theory.

the expected forward rate in the third year? A. according to the expectations theory. The following is a list of prices for zero coupon bonds with different maturities and par value of $1. A. D. longer maturities will have lower yields. Which one of the following statements is false? A.37% C. are identical. What is. 10. B. E. B and C. 9.15. A and B. 7. 9.23 B. and C. C. B. 16. E.9% E. C. none of the above 17. D. The expectations hypothesis indicates a flat yield curve if anticipated future short-term rates exceed the current short-term rate. vary in that market segmentation maintains that borrowers and lenders will not depart from their preferred maturities and preferred habitat maintains that market participants will depart from preferred maturities if yields on other maturities are attractive enough. The market segmentation and preferred habitat theories of term structure A. The segmentation hypothesis contends that borrows and lenders are constrained to particular segments of the yield curve.00% D. The basic conclusion of the expectations hypothesis is that the long-term rate is equal to the anticipated longterm rate. all other things being equal. B. The liquidity preference hypothesis indicates that. 5 . vary in that market segmentation is rarely accepted today.000.

D. ______ can occur if _____. none of the above 19. If the value of a Treasury bond was lower than the value of the sum of its part (STRIPPED cash flows) you could A. the Law of One Price is violated C. the FED would adjust interest rates. B and C E. profit by buying the stripped cash flows and reconstituting the bond. not profit by buying the stripped cash flows and reconstituting the bond. the Law of One Price is not violated D. B. the Law of One Price is violated E. the Law of One Price is not violated B. A. riskless economic profit. riskless economic profit. arbitrage.18. B and C E. B. arbitrage would probably occur. arbitrage would probably not occur. C. B and D 6 . arbitrage. If the value of a Treasury bond was lower than the value of the sum of its part (STRIPPED cash flows) A. profit by buying the bond and creating STRIPS. C. none of the above 20. D.

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