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Exam 15: The Term Structure of Interest Rates

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Question 1

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The yield curve A. is a graphical depiction of term structure of interest rates. B. is usually depicted for U.S. Treasuries in order to hold risk constant across maturities and yields. C. is usually depicted for corporate bonds of different ratings. D.is a graphical depiction of term structure of interest rates and is usually depicted for U.S. Treasuries in order to hold risk constant across maturities and yields. E. is a graphical depiction of term structure of interest rates and is usually depicted for corporate bonds of different ratings.

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D A C B Explanation: The yield curve (yields vs. maturities, all else equal) is depicted for U.S. Treasuries more frequently than for corporate bonds, as the risk is constant across maturities for Treasuries.

Question 2

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______ can occur if _____.

A) Arbitrage; the law of one price is not violated
B) Arbitrage; the law of one price is violated
C) Low-risk economic profit; the law of one price is not violated
D) Low-risk economic profit; the law of one price is violated
E) Arbitrage and low-risk economic profit; the law of one price is violated

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Question 3

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What should the purchase price of a 3-year zero-coupon bond be if it is purchased today and has face value of $1,000? $\begin{array}{lr}&\text { 1-Year } \\&\text { Forward }\\\text { Year } & \text { Rate } \\1 & 4.6 \% \\2 & 4.9 \% \\3 & 5.2 \% \\4 & 5.5 \% \\5 & 6.8 \%\end{array}$

What is the yield to maturity of a 4-year bond? $\begin{array}{lr}&\text { 1-Year } \\&\text { Forward }\\\text { Year } & \text { Rate } \\1 & 4.6 \% \\2 & 4.9 \% \\3 & 5.2 \% \\4 & 5.5 \% \\5 & 6.8 \%\end{array}$

Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lr}& \text { Forward } \\\text { Year } & \text { Interest Rate } \\\hline 0 & \text { (today) } 6 \% \\1 & 7 \% \\2 & 9 \% \\3 & 10 \%\end{array}$ What is the price of a 2-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000)

The on the run yield curve is

According to the expectations theory, what is the expected forward rate in the third year? The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $\begin{array}{cc}\text { Maturity }\\\text { (Years) } & \text { Price } \\1 & \$ 925.15 \\2 & 862.57 \\3 & 788.66 \\4 & 711.00\end{array}$

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $\begin{array}{cc}\text { Maturity }\\\text { (Years) } & \text { Price } \\1 & \$ 943.40 \\2 & 881.68 \\3 & 808.88 \\4 & 742.09\end{array}$ What is the yield to maturity on a 3-year zero-coupon bond?

What should the purchase price of a 2-year zero-coupon bond be if it is purchased at the beginning of year 2 and has face value of $1,000? $\begin{array}{lr}&\text { 1-Year } \\&\text { Forward }\\\text { Year } & \text { Rate } \\1 & 5 \% \\2 & 5.5 \% \\3 & 6.0 \% \\4 & 6.5 \% \\5 & 7.0 \%\end{array}$

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $\begin{array}{cc}\text { Maturity }\\\text { (Years) } & \text { Price } \\1 & \$ 943.40 \\2 & 881.68 \\3 & 808.88 \\4 & 742.09\end{array}$ According to the expectations theory, what is the expected forward rate in the third year?

What is the yield to maturity of a 1-year bond? $\begin{array}{lr}&\text { 1-Year } \\&\text { Forward }\\\text { Year } & \text { Rate } \\1 & 4.6 \% \\2 & 4.9 \% \\3 & 5.2 \% \\4 & 5.5 \% \\5 & 6.8 \%\end{array}$

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $\begin{array}{cc}\text { Maturity }\\\text { (Years) } & \text { Price } \\1 & \$ 925.15 \\2 & 862.57 \\3 & 788.66 \\4 & 711.00\end{array}$ What is the price of a 4-year maturity bond with a 10% coupon rate paid annually? (Par values = $1,000.)

If the value of a Treasury bond was higher than the value of the sum of its parts (STRIPPED cash flows) ,

If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows) ,

The yield curve shows at any point in time

Given the yield on a 3-year zero-coupon bond is 7% and forward rates of 6% in year 1 and 6.5% in year 2, what must be the forward rate in year 3?

Which of the following combinations will result in a sharply-increasing yield curve?

According to the expectations hypothesis, an upward-sloping yield curve implies that

What should the purchase price of a 1-year zero-coupon bond be if it is purchased today and has face value of $1,000? $\begin{array}{lr}&\text { 1-Year } \\&\text { Forward }\\\text { Year } & \text { Rate } \\1 & 4.6 \% \\2 & 4.9 \% \\3 & 5.2 \% \\4 & 5.5 \% \\5 & 6.8 \%\end{array}$

The expectations theory of the term structure of interest rates states that