Question 1

If the interest rate , the yield to maturity .

Accepted Answer

The answer of If the interest rate , the yield...

Question 2

If the bond price , the yield to maturity .

Accepted Answer

Bond price and yield to maturity have an inverse relationship, meaning if the bond price falls, the yield to maturity will rise.

Question 3

The relationship between bond interest rates with different maturities is called the:

Accepted Answer

The term structure of interest rates refers to the relationship between bond interest rates with different maturities. The other options are not directly related to this concept.

Question 4

If i (t) and i (t) are the interest rates on a 2-year and 1-year bond issued this year and i (t + 1) 2 1 1
Is the 1-year rate next year, the equilibrium relationship between the 2-year bond and the two
1-year bonds is:

Accepted Answer

According to the expectations hypothesis, the long-term interest rate (2-year bond rate) is the average of the current short-term interest rate (1-year bond rate) and the expected short-term interest rate (1-year bond rate next year). Therefore, i(t) = (1/2)[i(t) + i(t+1)].

Question 5

If P 0
= 110 is the initial price of the security, P
1
= 100 is the price after you hold it for a year,
And $$X = 1$$ represents a direct payment, an asset's rate of return is equal to:

Accepted Answer

The rate of return is calculated as $(P_1 - P_0 + X) / P_0$. Substituting the given values: $(100 - 110 + 1) / 110 = -9/110 = -0.0818$, which is approximately -8.2%.

Question 6

On last night's evening business news show you hear that "bond prices rose"; this is another way of saying that:

Accepted Answer

When bond prices rise, it means investors are willing to pay more for those bonds. As a result, the bonds' yield, or interest rate, decreases. Therefore, option C is the correct choice as bond prices rising indicate interest rates falling.

Question 7

According to the expectations theory of the term structure, the n-period interest rate is the:

Accepted Answer

The expectations theory of the term structure suggests that the n-period interest rate is the average of the current one-period rate and the expected future one-period rates over the next n periods.

Question 8

According to the expectations theory of the term structure, the equilibrium relationship between the n-period interest rate and the n 1-year interest rates is:

Accepted Answer

The answer of According to the expectations theory of the...

Question 9

Which of the following definitions is incorrect? I. Capital gain: the increase in an asset holder's wealth from a change in the asset's price
II. Return: the capital gain or loss from holding a security
III. Rate of return: return on a security as a percentage of its initial price

Accepted Answer

The definition of "Return" should include both capital gain or loss and any income received from the security, such as dividends or interest.

Question 10

Historically, most inverted yield curves have been caused by the Fed in an effort to:

Accepted Answer

Most inverted yield curves have been caused by the Fed in an effort to slow inflation. When inflation is a concern, the Fed raises short-term interest rates, which can lead to an inverted yield curve as long-term rates do not rise as much or even fall. This can signal a potential economic slowdown or even recession.

Question 11

An unusually steep yield curve suggests that:

Accepted Answer

An unusually steep yield curve is usually an indication that short-term interest rates are expected to rise. This is because the steepness of the yield curve reflects the difference in interest rates between short-term and long-term bonds. If long-term bond yields are increasing faster than short-term bond yields, then it suggests that investors expect short-term interest rates to rise in the near future.

Question 12

To account for risk in the expectations theory of the term structure, we:

Accepted Answer

The expectations theory suggests that long-term interest rates are an average of current and expected future short-term rates. To account for risk, a risk premium is added to this average to reflect the uncertainty and potential variability in future rates.

Question 13

If P 0
= 100 is the initial price of the security and P
1
= 103 is the price after you hold it for a
Year, the asset's rate of return is equal to:

Accepted Answer

The rate of return is calculated as (P1 - P0) / P0 * 100. In this case, the rate of return is (103 - 100) / 100 * 100 = 3%.

Question 14

The expectations theory of the term structure of interest rates ignores:

Accepted Answer

The expectations theory assumes that future interest rates are solely determined by current expectations and does not account for risk factors.

Question 15

(Figure 16.1 The Yield Curve)  Your mother asks you to explain the yield curve from November 11, 2006. She suspects something is wrong but isn't sure. What do you tell her? And what explanations do you have for why her suspicions are right?

Accepted Answer

The answer of (Figure 16.1 The Yield Curve)  Your...

Question 16

Consider the following two options:
a. You have $100 today and you put it into a savings account for 5 years, earning 5%; or b. You have $100 today and you put it into a savings account for 10 years, earning
2.5%.Which scenario has a higher future value when you take the money from the account? Explain.

Accepted Answer

The answer of Consider the following two options:
a. You have...

Question 17

If the n 1-year interest rates are expected to remain constant and the term premium rises with maturity, the yield curve would:

Accepted Answer

If the term premium rises with maturity, this means that longer-term bonds will have a higher yield than shorter-term bonds, resulting in an upward-sloping yield curve.

Question 18

If the n 1-year interest rates are expected to fall dramatically, the yield curve would:

Accepted Answer

The answer of If the n 1-year interest rates are...

Question 19

If i (2020) denotes the annual interest rate on 2-year bonds issued in 2020 and i (2020) and 2 1
I (2021) represent interest rates on 1-year bonds purchased in 2020 and 2021, the
1
Equilibrium relationship between the 2-year bond and the two 1-year bonds is:

Accepted Answer

The equilibrium relationship between the 2-year bond and the two 1-year bonds is based on the idea of no-arbitrage, meaning that an investor should be indifferent between buying the 2-year bond or buying a combination of the two 1-year bonds. 
If the interest rates on the two 1-year bonds purchased in different years are not equivalent, then there is an opportunity for arbitrage (profit without risk). 
In order to eliminate the opportunity for arbitrage, the interest rates on the two 1-year bonds should be combined in a way that is equivalent to the interest rate on the 2-year bond. 
The correct equation is i (2020) = (1/2)[i (2020) + i (2021)], which represents a weighted average of the interest rates on the two 1-year bonds, with equal weighting based on the assumption of no-arbitrage.

Question 20

The graph that compares interest rates with different maturities is called the:

Accepted Answer

The yield curve compares interest rates with different maturities, showing the relationship between short-term and long-term interest rates. It is used to analyze market expectations for future economic growth and inflation.

Quiz 16: Asset Prices and Interest Rates

If the interest rate , the yield to maturity .

If the bond price , the yield to maturity .

The relationship between bond interest rates with different maturities is called the:

If i (t) and i (t) are the interest rates on a 2-year and 1-year bond issued this year and i (t + 1) 2 1 1 Is the 1-year rate next year, the equilibrium relationship between the 2-year bond and the two 1-year bonds is:

If P 0 = 110 is the initial price of the security, P 1 = 100 is the price after you hold it for a year, And $X = 1$ represents a direct payment, an asset's rate of return is equal to:

On last night's evening business news show you hear that "bond prices rose"; this is another way of saying that:

According to the expectations theory of the term structure, the n-period interest rate is the:

According to the expectations theory of the term structure, the equilibrium relationship between the n-period interest rate and the n 1-year interest rates is:

Which of the following definitions is incorrect? I. Capital gain: the increase in an asset holder's wealth from a change in the asset's price II. Return: the capital gain or loss from holding a security III. Rate of return: return on a security as a percentage of its initial price

Historically, most inverted yield curves have been caused by the Fed in an effort to:

An unusually steep yield curve suggests that:

To account for risk in the expectations theory of the term structure, we:

If P 0 = 100 is the initial price of the security and P 1 = 103 is the price after you hold it for a Year, the asset's rate of return is equal to:

The expectations theory of the term structure of interest rates ignores:

(Figure 16.1 The Yield Curve) Your mother asks you to explain the yield curve from November 11, 2006. She suspects something is wrong but isn't sure. What do you tell her? And what explanations do you have for why her suspicions are right?

If the n 1-year interest rates are expected to remain constant and the term premium rises with maturity, the yield curve would:

If the n 1-year interest rates are expected to fall dramatically, the yield curve would:

If i (2020) denotes the annual interest rate on 2-year bonds issued in 2020 and i (2020) and 2 1 I (2021) represent interest rates on 1-year bonds purchased in 2020 and 2021, the 1 Equilibrium relationship between the 2-year bond and the two 1-year bonds is:

The graph that compares interest rates with different maturities is called the:

Quiz 16: Asset Prices and Interest Rates

If the interest rate , the yield to maturity .

If the bond price , the yield to maturity .

The relationship between bond interest rates with different maturities is called the:

If i (t) and i (t) are the interest rates on a 2-year and 1-year bond issued this year and i (t + 1) 2 1 1 Is the 1-year rate next year, the equilibrium relationship between the 2-year bond and the two 1-year bonds is:

If P 0 = 110 is the initial price of the security, P 1 = 100 is the price after you hold it for a year, And X=1X = 1X=1 represents a direct payment, an asset's rate of return is equal to:

On last night's evening business news show you hear that "bond prices rose"; this is another way of saying that:

According to the expectations theory of the term structure, the n-period interest rate is the:

According to the expectations theory of the term structure, the equilibrium relationship between the n-period interest rate and the n 1-year interest rates is:

Which of the following definitions is incorrect? I. Capital gain: the increase in an asset holder's wealth from a change in the asset's price II. Return: the capital gain or loss from holding a security III. Rate of return: return on a security as a percentage of its initial price

Historically, most inverted yield curves have been caused by the Fed in an effort to:

An unusually steep yield curve suggests that:

To account for risk in the expectations theory of the term structure, we:

If P 0 = 100 is the initial price of the security and P 1 = 103 is the price after you hold it for a Year, the asset's rate of return is equal to:

The expectations theory of the term structure of interest rates ignores:

(Figure 16.1 The Yield Curve) Your mother asks you to explain the yield curve from November 11, 2006. She suspects something is wrong but isn't sure. What do you tell her? And what explanations do you have for why her suspicions are right?

If the n 1-year interest rates are expected to remain constant and the term premium rises with maturity, the yield curve would:

If the n 1-year interest rates are expected to fall dramatically, the yield curve would:

If i (2020) denotes the annual interest rate on 2-year bonds issued in 2020 and i (2020) and 2 1 I (2021) represent interest rates on 1-year bonds purchased in 2020 and 2021, the 1 Equilibrium relationship between the 2-year bond and the two 1-year bonds is:

The graph that compares interest rates with different maturities is called the:

If P 0 = 110 is the initial price of the security, P 1 = 100 is the price after you hold it for a year, And $X = 1$ represents a direct payment, an asset's rate of return is equal to: