1. Which of the following is a security in which a saver buys the security for a given time to maturity, earning interest
at the specified rate?
a. Commercial paper
b. Debenture
c. Government bond
d. Certificates of deposit
2. The process of turning assets such as mortgages into bonds sold to investors is
a. default.
b. standard deviation.
c. standardization.
d. securitization.
3. A debt security sold by large corporations to raise short-term funds is known as a(n)
a. commercial paper.
b. treasury bill.
c. debenture.
d. bond.
4. A corporate bond with a financial rating of is likely to have the lowest yield to maturity.
a. Ccc
b. Baa
c. Aaa
d. BBB
5. Which of the following securities is likely to have the highest yield to maturity?
a. A corporate bond with a Baa rating
b. A corporate bond with AAA rating
c. A government bond exempted from federal income tax
d. A certificate of deposit with a three months to maturity
6. The U.S. Treasury security that was issued most recently, in the primary market, is known as the
a. off-the-run security.
b. on–the-run security.
c. in-the-money security.
d. out-of-the-money security.
7. Which of the following securities has the highest yield to maturity?
a. An on-the-run Treasury bond with ten years to maturity
b. An on–the–run Treasury bond with twenty years to maturity
c. An off-the-run Treasury bond with twenty-four years to maturity
d. An off-the–run Treasury bond with twelve years to maturity
8. An on-the–run ten-year Treasury security is
a. a ten-year government bond that is in greatest demand by investors who want to hold it until it matures.
b. a ten-year government bond that can be used to pay estate taxes, also known as a flower bond.
c. a non–taxable ten-year government bond.
d. a ten-year government bond that was the most recently issued.
9. A basis point equals
a. one hundredth of a percentage point.
b. one tenth of a percentage point.
c. one half of a percentage point.
d. ten percentage points.
10. When the federal tax rate on interest income is 20 percent, an investor will purchase
returns.
a. a local government bond with an interest rate of 7 percent
b. a corporate bond with an interest rate of 8 percent
c. a corporate bond with an interest rate of 8.5 percent
d. a local government bond with an interest rate of 6.5 percent
in order to maximize
11. Which of the following is true of a certificate of deposit?
a. It is sold by large corporations to raise short-term funds.
b. A fall in its demand will lead to an increase in the price of the security and a fall in its yield to maturity.
c. Higher the term to maturity of a certificate of deposit, higher the yield to maturity.
d. It is not a liquid security and cannot be transferred from one party to another.
12. Which of the following is a possible outcome of a fall in the demand for a security?
a. It will lead to an increase in the price and the yield to maturity of the security.
b. It will lead to an increase in the price of the security and a fall in its yield to maturity.
c. It will lead to a fall in the price of the security and a fall in its yield to maturity.
d. It will lead to a fall in the price of the security and an increase in its yield to maturity.
13. Which of the following was an outcome of the announcement made by the U.S. government in October 2001 that it
will stop selling 30-year bonds?
a. There was a sharp fall in the price of the securities and an increase in the yield to maturity.
b. There was a sharp rise in the price of the securities and a decline in the yield to maturity.
c. There was a sharp rise in the price of the securities and an increase in the yield to maturity.
d. There was a sharp fall in the price of the securities and a decline in the yield to maturity.
14. The relationship between interest rates with differing times to maturity is known as the of
interest rates.
a. term structure
b. term curve
c. yield curve
d. yield structure
15. Which of the following is true of short-term interest rates?
a. Short-term interest rates decline when long-term interest rates increase.
b. Short-term interest rates are more volatile than long-term interest rates.
c. Short-term interest rates are higher than long-term interest rates.
d. Short-term interest rates are less volatile than long-term interest rates.
16. What does a yield curve show?
a. The yield to maturity on the vertical axis and the time to maturity on the horizontal axis
b. The time to maturity on the vertical axis and the yield to maturity on the horizontal axis
c. The yield to maturity on the vertical axis and the maturity date on the horizontal axis
d. The maturity date on the vertical axis and the yield to maturity on the horizontal axis
17. The interest that an investor will earn, on maturity, if she purchases a two year bond by paying 6.6 percent today is
a. 1.1025.
b. 1.1363.
c. 1.0036.
d. 1.0003.
18. Suppose that a risk-neutral investor has a choice between buying a one-year bond paying 4 percent today, a two-
year bond paying 5 percent today, a three-year bond paying 5.3 percent today, or a four-year bond paying 5.8
percent today. The investor would buy
a. a one-year bond today.
b. a two-year bond today.
c. a three-year bond today.
d. a four-year bond today.
19. Which of the following bonds has a comparatively higher yield to maturity?
a. A one-year bond with a 6.7 percent interest today
b. A three-year bond with a 5 percent interest today
c. A two-year bond with a 4 percent interest today
d. A four-year bond with a 4.5 percent interest today
20. The analysis of the term structure of interest rates assumes that
a. there is uncertainty about future interest rates.
b. there is no risk involved in the purchase and sale of long-term securities.
c. short-term and long-term securities offer the same rate of interest.
d. there are no transaction costs.
21. Which of the following is true of the analysis of the term structure of interest rates?
a. It assumes that investors in long-term securities face high transaction costs.
b. It assumes that investors can predict short-term interest rates accurately.
c. It assumes that the yield curve is always flat.
d. It assumes that investors in bonds have a preferred habitat.
22. According to the expectations theory of the term structure of interest rates,
a. a short-term interest rate is equal to the average of current and expected future long-term interest rates.
b. a short-term interest rate has no relation to long-term interest rates.
c. a long-term interest rate is equal to the average of current and expected future short-term interest rates.
d. the yield curve is always flat.
23. Consider a two-year bond that can be purchased for $550. What is the yield to maturity on the bond if it promises a
payment of $890 in two years?
a. 27.2 percent
b. 20 percent
c. 6 percent
d. 18.1 percent
24. Suppose an investor purchases a one–year bond today, for $960. The bond promises a return of $1,000. She
purchases another one-year bond, after a year, for $887 that promises a return of $990. What is the yield to maturity
earned by the investor on the purchase of these two short-term bonds?
a. 6.50 percent
b. 7.85 percent
c. 8 percent
d. 10 percent
25. The present value of a two-year bond with a future payment of $1,345.50 and the yield to maturity of 3.6 percent is
a. $1,300
b. $1,500.50
c. $1,253.62
d. $1,246.72
26. If the interest rate on a one-year bond today is 7.5 percent and the expected interest rate on a one-year bond one
year from now is 5.6 percent, then the interest rate on a two-year bond will be
a. 7 percent
b. 12.5 percent
c. 8.5 percent
d. 6.55 percent
27. According to the expectations theory of the term structure of interest rates, if the interest rate on a one-year bond
today is 3.0 percent, the expected interest rate on a one-year bond one year from now is 4.0 percent, and the
expected interest rate on a one-year bond two years from now is 4.5 percent, then the interest rate on a two-year
bond today is
a. 3.00 percent.
b. 3.50 percent.
c. 3.83 percent.
d. 4.00 percent.
28. What does a flat yield curve imply, according to the expectations theory of the term structure of interest rates?
a. The price level will not change in the future.
b. Future long-term rates are expected to rise.
c. Future long-term rates are expected to fall.
d. Future short-term rates are not expected to change.
29. What does a downward-sloping yield curve imply, according to the expectations theory of the term structure of
interest rates?
a. Investors expect long-term interest rates to rise in the future.
b. Investors expect future short-term interest rates to be lower than the current short-term interest rate.
c. Investors expect future short-term interest rates to be the same as the current short-term interest rate.
d. Investors expect future short-term interest rates to be higher than the current short-term interest rate.
30. What does an upward-sloping yield curve imply, according to the expectations theory of the term structure of interest
rates?
a. Investors expect long-term interest rates to fall in the future.
b. Investors expect future short-term interest rates to be lower than the current short-term interest rate.
c. Investors expect future short-term interest rates to be the same as the current short-term interest rate.
d. Investors expect future short-term interest rates to be higher than the current short-term interest rate.
31. Term premium refers to
a. the interest rate on a long-term bond minus the average interest rate on future short-term bonds.
b. the interest rate on a long-term bond plus the average interest rate on future short-term bonds.
c. the average interest rate on future short-term bonds.
d. the standard deviation of the interest rate on long-term bonds.
32. Which of the following statements is true?
a. A short-term bond and a long-term bond provides the same premium.
b. Investors in short-term bonds earn higher premiums than investors in long-term bonds.
c. A change in the interest rates of bonds affect the prices of long-term bonds more than the prices of short-
term bonds.
d. A change in the interest rates of bonds affect the prices of short-term bonds more than the prices of long–
term bonds.
33. Consider the bond market to be in equilibrium according to our complete theory of the term structure of interest rates.
The current interest rate on one-year bonds is 3.0 percent, and you believe, as does everyone in the market, that in
one year the interest rate on one-year bonds will be 3.5 percent. Assume that there is no term premium on a one-year
bond. Suppose there is a term premium equals 0.75 percent × the number of years to maturity, for the two- year
bond. The interest rate today on the two-year bond is
a. 3.25 percent.
b. 4.00 percent.
c. 4.75 percent.
d. 5.00 percent.
34. Consider the following hypothetical situation. The interest rate on a two-year bond today is 7.5 percent and the
interest rates on two one-year bonds are 3 percent and 4 percent respectively. The term premium earned by the
investors is
a. 5 percent.
b. 4 percent.
c. 4.25 percent.
d. 6 percent.