Question 1: Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to
- be unaffected.
- become upward sloping.
- become inverted.
- become flat.
Question 2: The yield offered on a debt security is ____ related to the prevailing risk-free rate and ____ related to the security's risk premium.
- negatively; positively
- negatively; negatively
- positively; negatively
- positively; positively
Question 3: Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate according to the pure expectations theory?
- 11.41 percent
- 12.62 percent
- 3.00 percent
- 15.08 percent
- 12.00 percent
Question 4: Assume that a yield curve is influenced by interest rate expectations and a liquidity premium. Assume the yield curve is initially flat. If liquidity suddenly was no longer important, the yield curve would now have a ____ (assuming no other changes).
- slight downward slope
- steep downward slope
- slight upward slope
- steep upward slope
Question 5: Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, then the one-year forward rate is
- 3.0 percent.
- 7.0 percent.
- 8.0 percent.
- 7.6 percent.
Question 6: If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting ____ in interest rates.
- a large increase
- a slight increase
- a slight decrease
- no changes
Question 7: Assume that the Treasury bond yield today is 2% higher than it was one year ago. Also assume that the credit (default) risk premium of an A-rated bond declined by 0.4% since one year ago. A newly issued A-rated bond will likely offer a yield today that is ____ the yield that was offered on an A-rated bond issued one year ago.
- greater than
- equal to
- less than
- A or B are both common
Question 8: Securities that offer ____ liquidity will offer a ____ yield to be preferred.
- lower; higher
- B and C
- lower; lower
- higher; higher
Question 9: If all other characteristics are similar, ____ would have to offer ____.
- taxable securities; a higher after-tax yield than tax-exempt securities
- tax-exempt securities; a higher before-tax yield than taxable securities
- tax-exempt securities; a higher after-tax yield than taxable securities
- taxable securities; a higher before-tax yield than tax-exempt securities
Question 10: An investor's tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax yield of 11 percent?
- 7.7 percent
- none of the above
- 15.71 percent
- 130 percent
- 11.00 percent