Chapter15TheTermStructureofInterestRates.doc

Chapter 15The Term Structure of Interest Rates  Multiple Choice Questions 1. The term structure of interest rates is: A. The relationship between the rates of interest on all securities.B. The relationship between the interest rate on a security and its time to maturity.C. The relationship between the yield on a bond and its default rate.D. All of these are correct.E. None of these is correct. 2. Treasury STRIPS are 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. created both by selling each coupon or principal payment from a whole Treasury bond as a separate cash flow and by pooling mortgage payments made to the Treasury. 3. The value of a Treasury bond should A. be equal to the sum of the value of STRIPS created from it.B. be less than the sum of the value of STRIPS created from it.C. be greater than the sum of the value of STRIPS created from it.D. be greater than or less than the sum of the value of STRIPS created from it.E. None of these is correct.   4. If the value of a Treasury bond was higher than the value of the sum of its parts (STRIPPED cash flows) you could  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 but profit by buying the bond and creating STRIPS.E.  None of these is correct.  Multiple Choice Questions 5. If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows) you could 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 these is correct. 6. If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows) A. arbitrage would probably occur.B. arbitrage would probably not occur.C. the FED would adjust interest rates.D. arbitrage would probably not occur and the FED would adjust interest rates.E. None of these is correct. 7. If the value of a Treasury bond was higher than the value of the sum of its parts (STRIPPED cash flows) A. arbitrage would probably occur.B. arbitrage would probably not occur.C. the FED would adjust interest rates.D. arbitrage would probably not occur and the FED would adjust interest rates.E. None of these is correct. 8. Bond stripping and bond reconstitution offer opportunities for ______, which can occur if the _________ is violated. A. arbitrage; Law of One PriceB. arbitrage; restrictive covenantsC. huge losses; Law of One PriceD. huge losses; restrictive covenantsE. both arbitrage and huge losses; restrictive covenants 9. ______ can occur if _____. A. arbitrage; the Law of One Price is not violatedB. arbitrage; the Law of One Price is violatedC. riskless economic profit; the Law of One Price is not violatedD. riskless economic profit; the Law of One Price is violatedE. both arbitrage and riskless economic profit; the Law of One Price is violated 10. The yield curve shows at any point in time: 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 these are correct.E. None of these is correct. 11. An inverted yield curve implies that: A. Long-term interest rates are lower than short-term interest rates.B. Long-term interest rates are higher than short-term interest rates.C. Long-term interest rates are the same as short-term interest rates.D. Intermediate term interest rates are higher than either short- or long-term interest rates.E. None of these is correct. 12. An upward sloping yield curve is a(n) _______ yield curve. A. normalB. humpedC. invertedD. flatE. None of these is correct 13. According to the expectations hypothesis, an upward sloping yield curve implies that 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. 14. Which of the following is not proposed as an explanation for the term structure of interest rates? A. The expectations theory.B. The liquidity preference theory.C。