TEST BANK
CAPITAL MARKETS: INSTITUTIONS AND INSTRUMENTS
FABOZZI/MODIGLIANI
Chapter 19
THE TERM STRUCTURE OF INTEREST RATES
MULTIPLE CHOICE
1. The relationship between yield and maturity is referred to as:
[E]
2. The graphical depiction of the relationship between the yield on bonds of the same credit
quality but different maturities is known as:
[E]
3. Using spot rates, the theoretical value of a bond is calculated:
[M]
4. The current Treasury yield curve can be used to extrapolate the:
5. A future interest rate calculated from either the spot rates or the yield curve is called:
[M]
6. The two elements of a forward rate are:
[M]
7. Forward rates are also referred to as:
[M]
8. The shape of the yield curve can be explained by:
[E]
9. Forward rates exclusively represent the expected future rates according to the:
10. Price risk of a bond occurs when a bond must be sold prior to maturity at an uncertain
price because the:
[M]
11. The risk associated with a bond whose proceeds are reinvested at an unknown rate is
referred to as:
[E]
12. If an investor has a six-month investment horizon, buying a 5-year, 10-year, or 20-year
bond will produce the same six-month return. This interpretation of the pure expectations
[M]
13. According to the liquidity theory of the term structure, the forward rate should reflect
both interest rate expectations and:
[M]
15. The market segmentation theory recognizes that investors have preferred habitats, which
are dictated by:
[M]
16. Market participants tend to construct yield curves from observations of prices and yields
in the:
[E]
17. When the yield rises steadily as the maturity increases, the yield curve is said to be:
[M]
18. When the yield declines as maturity increases, the yield curve is said to be:
[M]
19. Treasury securities are free of:
20. The risks that cause uncertainty about the return over some investment horizon are:
TRUE/FALSE
1. As the largest and most active bond market, the Treasury market offers the fewest
problems of illiquidity.
[E]
2. The basic principle underlying the bootstrapping technique is that the value of the
Treasury coupon security should be equal to the value of the package of zero-coupon
Treasury securities that duplicates the coupon bond’s cash flow.
[M]
3. The yield of bonds of the same credit quality does not depend on their maturity alone.
[M]
4. The pure expectations theory postulates that no systematic factors other than expected
future short-term rates affect forward rates.
[E]
5. The market segmentation theory proposes that the major reason for the shape of the yield
curve lies in asset/liability management constraints.
ESSAY QUESTIONS
1. Explain the difference between the term structure of interest rates and the yield curve.
Key Issues:
2. Compare and contrast the three forms of the expectations theory.
Key Issues:
3. Differentiate between price risk and reinvestment risk.
Key Issues: