Chapter 03: Structure of Interest Rates
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b.
nonexistent.
c.
the same as the United States at any point in time.
d.
none of the above
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
40. If research showed that anticipation about future interest rates was the only important factor for all investors in
choosing short-term or long-term securities, this would support the argument made by the
a.
liquidity premium theory.
b.
expectations theory.
c.
segmented markets theory.
d.
A and B
b
1
Easy
United States – BUSPROG.FMAI.MADU.15.03
United States – OH – DISC.FMAI.MADU.15.02
Bloom’s: Knowledge
41. If research showed that all investors attempt to purchase securities that perfectly match the time for which they will
have available funds, this would specifically support the argument made by the
a.
liquidity premium theory.
b.
real interest rate theory.
c.
expectations theory.
d.
segmented markets theory.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
42. Assume that debt maturity markets are segmented, such that short-term debt markets are funded by surplus units that
are different from the surplus units that fund the long-term debt markets. If the Treasury uses a relatively large proportion
of ____ debt to finance the deficit, this may place upward pressure on ____ interest rates.
a.
long-term; long-term
b.
long-term; short-term
c.
short-term; long-term
d.
B and C
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ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.03.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
43. You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You are in the 28
percent tax bracket. To match this after-tax yield, you would consider taxable securities that pay
a.
31.1 percent.
b.
19 percent.
c.
12.5 percent.
d.
14 percent.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Application
44. The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while
the one-year interest rate is 9 percent. The forward rate one-year ahead is ____ percent.
a.
2.8
b.
115
c.
103
d.
15.1
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Application
45. The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while
the one-year interest rate is 9 percent. The forward rate two years ahead is ____ percent.
a.
1.8
b.
9.0
c.
15.0
d.
none of the above
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
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46. According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-
term funds, this will place ____ pressure on the demand for long-term funds issued by borrowers and the yield curve will
be ____ sloping.
a.
upward; downward
b.
downward; upward
c.
upward; upward
d.
downward; downward
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
47. An upward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.
a.
longer; lower
b.
longer; higher
c.
shorter; lower
d.
shorter; higher
e.
B and C
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
48. Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of T-bills.
This action will ____ the supply of T-bills in the market and place ____ pressure on the yield of T-bills.
a.
decrease; downward
b.
decrease; upward
c.
increase; upward
d.
increase; downward
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
LEARNING OBJECTIVES:
FMAI.MADU.15.03.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Application
Chapter 03: Structure of Interest Rates
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b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
53. Investors will always prefer the purchase of risk-free Treasury securities, since other securities have a higher level of
risk.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
54. The higher a bond rating, the lower the perceived credit risk.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
55. Treasury securities are exempt from federal and state income taxes.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
56. The term structure of interest rates defines the relationship between maturity and annualized yield, holding other
factors such as risk constant.
Chapter 03: Structure of Interest Rates
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a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
57. The graphic comparison of maturities and annualized yields is known as the interest rate curve.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
58. According to the segmented markets theory, the term structure of interest rates is determined solely by expectations of
future interest rates.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
59. The forward rate is commonly used to represent the market’s forecast of the future interest rate.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
60. Other things being equal, an expected decrease in interest rates will increase the demand for long-term funds by
Chapter 03: Structure of Interest Rates
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Page 19
borrowers.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
61. The preference for more liquid short-term securities places downward pressure on the slope of the
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
62. When expectations theory is combined with the liquidity theory, the yield on a security will always be equal to the
yield from consecutive investments in shorter-term securities over the same investment horizon.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.03.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
63. The segmented markets theory suggests that although investors and borrowers may normally concentrate on a
particular natural maturity market, certain events may cause them to wander from it.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
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64. If the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on longer-term
securities, even when they have funds for only a short period of time. This strategy is known as riding the yield curve.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
65. Yield curves are always upward sloping.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
66. Which of the following statements is not true with respect to debt securities?
a.
Some types of debt securities always offer a higher yield than others.
b.
Debt securities offer different yields because they exhibit different characteristics that influence the offered
yield.
c.
In general, securities with favorable characteristics will offer higher yields to entice investors.
d.
All of the above are true with respect to debt securities.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
67. Which of the following is not a characteristic affecting the yields on debt securities?
a.
credit (default) risk
b.
liquidity
c.
tax status
d.
term to maturity
e.
All of the above affect yields on debt securities.
ANSWER:
a
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68. All other characteristics being equal, securities with ____ liquidity would have to offer a ____ yield to be preferred.
a.
lower; higher
b.
higher; higher
c.
lower; lower
d.
none of the above
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
69. A downward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.
a.
longer; lower
b.
longer; higher
c.
shorter; lower
d.
shorter; higher
e.
Answers A and D are correct.
ANSWER:
e
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
70. Assume that the Treasury experiences a large increase in the budget deficit and issues a large number of T-bills. This
action will ____ the supply of T-bills in the market and place ____ pressure on the yield of T-bills.
a.
decrease; downward
b.
decrease; upward
c.
increase; upward
d.
increase; downward
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.02
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
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71. If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield
curve should be
a.
flat
b.
downward sloping.
c.
upward sloping.
d.
none of the above.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
72. If interest rates are expected to decrease, the yield on new short-term securities may be expected to ____, and the yield
curve should be ____ sloping.
a.
increase; upward
b.
increase; downward
c.
decrease; upward
d.
decrease; downward
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
73. According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-
term funds, this will place ____ pressure on the demand for short-term funds by borrowers and the yield curve will be
____ sloping.
a.
upward; downward
b.
downward; upward
c.
upward; upward
d.
downward; downward
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.03.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
Chapter 03: Structure of Interest Rates
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ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
78. A flat or inverted yield curve is most commonly interpreted to signal that that the economy will strengthen in the near
future and that interest rates will rise.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
79. The yields of securities commonly move in the same direction over time.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.03.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
80. Because interest rates may vary significantly across countries at a given point in time, investors do not monitor the
term structures of interest rates in foreign countries unless they are interested in investing in a particular foreign country.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.03.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge