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1、Chapter 15 The Term Structure of Interest Rates Multiple Choice Questions1.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
2、yield on a bond and its default rate. D)All of the above. E)None of the above. Answer: B Difficulty: Easy Rationale: The term structure of interest rates is the relationship between two variables, years and yield to maturity (holding all else constant).2.The yield curve shows at any point in time: A
3、)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 above. E)None of the above. Answer: C Diffi
4、culty: Easy 3.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
5、higher than either short- or long-term interest rates. E)none of the above. Answer: A Difficulty: Easy Rationale: The inverted, or downward sloping, yield curve is one in which short-term rates are higher than long-term rates. The inverted yield curve has been observed frequently, although not as fr
6、equently as the upward sloping, or normal, yield curve.4.An upward sloping yield curve is a(n) _ yield curve. A)normal. B)humped. C)inverted. D)flat. E)none of the above. Answer: A Difficulty: Easy Rationale: The upward sloping yield curve is referred to as the normal yield curve, probably because,
7、historically, the upward sloping yield curve is the shape that has been observed most frequently.5.According to the expectations hypothesis, a normal 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)inter
8、est 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. Answer: C Difficulty: Easy Rationale: An upward sloping yield curve is based on the expectation that short-term interest ra
9、tes will increase.6.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)The market segmentation theory. D)Modern portfolio theory. E)A, B, and C. Answer: D Difficulty: Easy Rationale: A, B,
10、and C are all theories that have been proposed to explain the term structure.7.The expectations theory of the term structure of interest rates states that A)forward rates are determined by investors expectations of future interest rates. B)forward rates exceed the expected future interest rates. C)y
11、ields on long- and short-maturity bonds are determined by the supply and demand for the securities. D)all of the above. E)none of the above. Answer: A Difficulty: Easy Rationale: The forward rate equals the market consensus expectation of future short interest rates.8.Which of the following theories
12、 state that the shape of the yield curve is essentially determined by the supply and demands for long-and short-maturity bonds? A)Liquidity preference theory. B)Expectations theory. C)Market segmentation theory. D)All of the above. E)None of the above. Answer: C Difficulty: Easy Rationale: Market se
13、gmentation theory states that the markets for different maturities are separate markets, and that interest rates at the different maturities are determined by the intersection of the respective supply and demand curves.9.According to the liquidity preference theory of the term structure of interest
14、rates, the yield curve usually should be: A)inverted. B)normal. C)upward sloping D)A and B. E)B and C. Answer: E Difficulty: Easy Rationale: According to the liquidity preference theory, investors would prefer to be liquid rather than illiquid. In order to accept a more illiquid investment, investor
15、s require a liquidity premium and the normal, or upward sloping, yield curve results.Use the following to answer questions 10-13:Suppose that all investors expect that interest rates for the 4 years will be as follows:10.What is the price of 3-year zero coupon bond with a par value of $1,000? A)$863.83 B)$816.58 C)$772.18 D)$765.55 E)none of the above Answer: B Difficulty: Moderate Ratio
