Question 1

The segmented markets theory

Accepted Answer

The segmented markets theory suggests that investors have preferences for certain maturities, and therefore, the markets for different maturity securities are segmented or separated from each other. This theory has difficulty explaining why yields on instruments of different maturities tend to move together since it assumes that investors do not switch between maturities, and therefore, the yields on different maturities are independent of each other. However, in reality, changes in interest rates and expectations can affect all maturities, creating a relationship between the yields on different maturities. Therefore, the segmented markets theory has trouble explaining this phenomenon.

Question 2

Which of the following statements is true of the yield curve?

Accepted Answer

The answer of Which of the following statements is true...

Question 3

The segmented markets theory

Accepted Answer

The segmented markets theory suggests that different maturities of bonds are not substitutes for each other, and investors have a preference for a particular maturity. If the demand for short-term bonds is greater than the demand for long-term bonds, then the yield curve will slope upwards.

Question 4

If the expected path of interest rates on one-year bonds over the next five years is 2%, 4%, 3%, 2%, and 1%, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of

Accepted Answer

According to the expectations theory, the interest rate on a long-term bond is the average of the expected future short-term interest rates. Since the expected path starts at 2% and increases, the one-year bond, which reflects the current short-term rate, will have the lowest interest rate today.

Question 5

A one-year bond currently pays 5% interest. It's expected that it will pay 4.5% next year and 4% the following year. The two-year term premium is 0.2% while the three-year term premium is 0.35%. What is the interest rate on a two-year bond according to the preferred habitat theory?

Accepted Answer

The interest rate on a two-year bond, according to the preferred habitat theory, can be calculated by taking the average of the expected interest rates for the next two years and adding the term premium for the two-year bond. The expected interest rates are 5% for the current year and 4.5% for the next year, giving an average of (5% + 4.5%) / 2 = 4.75%. Adding the two-year term premium of 0.2% results in a two-year bond interest rate of 4.75% + 0.2% = 4.95%.

Question 6

A one-year bond currently pays 5% interest. It's expected that it will pay 4.5% next year and 4% the following year. The two-year term premium is 0.2% while the three-year term premium is 0.35%. What is the interest rate on a three-year bond according to the preferred habitat theory?

Accepted Answer

The interest rate on a three-year bond according to the preferred habitat theory is calculated by averaging the expected future one-year interest rates and adding the term premium. The average expected rate over the three years is (5% + 4.5% + 4%)/3 = 4.5%. Adding the three-year term premium of 0.35% gives 4.85%.

Question 7

A steep yield curve may be an indicator of

Accepted Answer

A steep yield curve suggests that investors expect higher inflation in the future, leading to higher long-term interest rates. This can be seen as a sign of economic growth, but also a risk of inflation.

Question 8

Under the expectations theory if market participants expect that future short-term rates will be higher than current short-term rates, the yield curve will

Accepted Answer

According to the expectations theory, an upward slope indicates that investors expect future short-term rates to be higher than current short-term rates.

Question 9

According to the preferred habitat theory, what does a flat yield curve indicate?

Accepted Answer

The answer of According to the preferred habitat theory, what...

Question 10

Which of the following is true of the segmented markets theory?

Accepted Answer

The segmented markets theory assumes that borrowers have specific time frames for which they need to borrow, such as short-term borrowing needs for working capital or long-term borrowing needs for capital investment. This theory also assumes that lenders may prefer to lend for specific periods as well, rather than being willing to lend across all maturities.

Question 11

Which of the following statements is true?

Accepted Answer

Liquidity refers to how easily an asset can be converted into cash without affecting its market price. More liquid bonds are generally considered safer and therefore can be issued at a lower interest rate. Investors are willing to accept lower returns for the ease of buying and selling the bond.

Question 12

Unlike the segmented markets theory, the expectations theory attributes the slope of the yield curve to

Accepted Answer

The expectations theory suggests that the slope of the yield curve is based on market expectations of future interest rates. It assumes that investors are indifferent between short-term and long-term bonds and will base their investment decisions on the expected future interest rates, which influence the yields on bonds of different maturities. Therefore, the expectations theory attributes the slope of the yield curve to market expectations.

Question 13

The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that

Accepted Answer

The expectations theory assumes that instruments with different maturities are perfect substitutes, meaning that an investor would be indifferent between investing in a short-term bond or a long-term bond if the expected returns were the same. Therefore, the theory implies that expected returns for a holding period must be the same for bonds of different maturities. The theory is not dependent on the slope of the yield curve or the risk aversion of savers.

Question 14

The expectations theory

Accepted Answer

The expectations theory has difficulty explaining why yield curves usually slope upward, which is contrary to the theory's prediction that long-term bonds should have the same yield as a series of shorter-term bonds that, when combined, have the same maturity as the long-term bond.

Question 15

Which of the following is NOT true of the expectations theory?

Accepted Answer

The expectations theory does not imply that the yield curve will usually slope upward. In fact, the shape of the yield curve depends on the expected pattern of future short-term rates, which means it can slope upward, downward or be flat.

Question 16

The yield on a thirty-year Treasury bond is 8% at the same time as the yield on two-year Treasury note is 5%. This occurrence

Accepted Answer

The segmented markets theory explains interest rates by the supply and demand for funds within each market segment (e.g., short-term vs. long-term bonds) without assuming that investors will substitute between segments. The difference in yields between the thirty-year Treasury bond and the two-year Treasury note can be explained by this theory, as it suggests that different investor preferences and supply/demand conditions in the long-term and short-term markets lead to different yields.

Question 17

According to the expectations theory, if investors believed that, for a holding period the average of the expected future short-term yields was greater than the long-term yield, they would act so as to

Accepted Answer

According to the expectations theory, if investors believe that the average of the expected future short-term yields is greater than the long-term yield, they will expect to earn a higher return by investing in short-term securities than in long-term securities. This will lead to an increase in demand for short-term securities, driving up their prices and driving down the prices of long-term securities.

Question 18

According to the preferred habitat theory, the yield curve normally has a positive slope because

Accepted Answer

The preferred habitat theory states that investors have a preferred maturity or "habitat" for their investments and will only deviate from this preferred habitat if they are compensated with a term premium. Therefore, the yield curve is normally upward sloping because investors typically prefer short-term investments and require additional compensation in the form of higher yields for longer-term investments, which results in a positive term premium and a steeper yield curve.

Question 19

What is the most important contrast between the segmented markets theory and the expectations theory?

Accepted Answer

The expectations theory posits that investors see bonds of different maturities as perfect substitutes, while the segmented markets theory suggests that they do not, as investors have preferences for specific maturities.

Question 20

The expectations theory suggests that

Accepted Answer

The expectations theory suggests that the slope of the yield curve depends on the expected future path of short-term rates. In other words, if investors expect short-term rates to rise in the future, the yield curve will be upward-sloping to compensate for this expectation. Conversely, if investors expect short-term rates to fall in the future, the yield curve will be downward-sloping. The theory assumes that all bonds have the same risk and liquidity characteristics, so it does not incorporate a risk premium into long-term bond yields.

Quiz 7: Risk Structure and Term Structure of Interest Rates

The segmented markets theory

Which of the following statements is true of the yield curve?

The segmented markets theory

If the expected path of interest rates on one-year bonds over the next five years is 2%, 4%, 3%, 2%, and 1%, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of

A one-year bond currently pays 5% interest. It's expected that it will pay 4.5% next year and 4% the following year. The two-year term premium is 0.2% while the three-year term premium is 0.35%. What is the interest rate on a two-year bond according to the preferred habitat theory?

A one-year bond currently pays 5% interest. It's expected that it will pay 4.5% next year and 4% the following year. The two-year term premium is 0.2% while the three-year term premium is 0.35%. What is the interest rate on a three-year bond according to the preferred habitat theory?

A steep yield curve may be an indicator of

Under the expectations theory if market participants expect that future short-term rates will be higher than current short-term rates, the yield curve will

According to the preferred habitat theory, what does a flat yield curve indicate?

Which of the following is true of the segmented markets theory?

Which of the following statements is true?

Unlike the segmented markets theory, the expectations theory attributes the slope of the yield curve to

The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that

The expectations theory

Which of the following is NOT true of the expectations theory?

The yield on a thirty-year Treasury bond is 8% at the same time as the yield on two-year Treasury note is 5%. This occurrence

According to the expectations theory, if investors believed that, for a holding period the average of the expected future short-term yields was greater than the long-term yield, they would act so as to

According to the preferred habitat theory, the yield curve normally has a positive slope because

What is the most important contrast between the segmented markets theory and the expectations theory?

The expectations theory suggests that