Question 1

Statistical estimation of the yield curve contains apparent pricing error.These error terms are probably a result of

Accepted Answer

A)  tax effects. 
B)  call provisions. 
C)  out of date price quotes. 
D)  all of these. 
E)  none of these. 
A)  tax effects. 
B)  call provisions. 
C)  out of date price quotes. 
D)  all of these. 
E)  none of these.

Question 2

If you have just purchased a 4-year zero coupon bond,what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000)

Accepted Answer

A)  5% 
B)  3% 
C)  9% 
D)  10% 
E)  None of these is correct. 
A)  5% 
B)  3% 
C)  9% 
D)  10% 
E)  None of these is correct.

Question 3

Suppose that all investors expect that interest rates for the 4 years will be as follows: $$\begin{array} { c r } 
\text { Year } & \text { Forward Interest Rate } \
\hline 0& \text { (today) } 5 \% \
1 & 7 \% \
2 & 9 \% \
3 & 10 \%
\end{array}$$
If you have just purchased a 4-year zero coupon bond,what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000)

Accepted Answer

A)  5% 
B)  7% 
C)  9% 
D)  10% 
E)  none of these 
A)  5% 
B)  7% 
C)  9% 
D)  10% 
E)  none of these

Question 4

Investors can use publicly available financial date to determine which of the following?
I.the shape of the yield curve
II.future short-term rates
III.the direction the S&P/TSX composite index is heading
IV.the actions to be taken by the Bank of Canada

Accepted Answer

A)  I and II 
B)  I and III 
C)  I,II,and III 
D)  I,III,and IV 
E)  I,II,III,and IV 
A)  I and II 
B)  I and III 
C)  I,II,and III 
D)  I,III,and IV 
E)  I,II,III,and IV

Question 5

Discuss the two prevailing theories of the term structure of interest rates.Include in your discussion the differences in the theories,and the advantages/disadvantages of each.

Accepted Answer

The expectations hypothesis is the most

Question 6

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

Accepted Answer

A)  forward rates are determined by investors' expectations of future interest rates. 
B)  forward rates exceed the expected future interest rates. 
C)  yields on long-and short-maturity bonds are determined by the supply and demand for the securities. 
D)  all of these. 
E)  none of these. 
A)  forward rates are determined by investors' expectations of future interest rates. 
B)  forward rates exceed the expected future interest rates. 
C)  yields on long-and short-maturity bonds are determined by the supply and demand for the securities. 
D)  all of these. 
E)  none of these.

Question 7

The yield curve

Accepted Answer

A)  is a graphical depiction of term structure of interest rates. 
B)  is usually depicted for Canada bonds in order to hold risk constant across maturities and yields. 
C)  is usually depicted for corporate bonds of different ratings. 
D)  a and b. 
E)  a and c. 
A)  is a graphical depiction of term structure of interest rates. 
B)  is usually depicted for Canada bonds in order to hold risk constant across maturities and yields. 
C)  is usually depicted for corporate bonds of different ratings. 
D)  a and b. 
E)  a and c.

Question 8

Interest rates might decline

Accepted Answer

A)  because real interest rates are expected to decline. 
B)  because the inflation rate is expected to decline. 
C)  because nominal interest rates are expected to increase. 
D)  a and b. 
E)  b and c. 
A)  because real interest rates are expected to decline. 
B)  because the inflation rate is expected to decline. 
C)  because nominal interest rates are expected to increase. 
D)  a and b. 
E)  b and c.

Question 9

Suppose that all investors expect that interest rates for the 4 years will be as follows: $$\begin{array} { c r } 
\text { Year } & \text { Forward Interest Rate } \
\hline 0& \text { (today) } 5 \% \
1 & 7 \% \
2 & 9 \% \
3 & 10 \%
\end{array}$$
What is the yield to maturity of a 3-year zero coupon bond?

Accepted Answer

A)  7.00% 
B)  9.00% 
C)  6.99% 
D)  7.49% 
E)  none of these 
A)  7.00% 
B)  9.00% 
C)  6.99% 
D)  7.49% 
E)  none of these

Question 10

The most recently issued Treasury securities are called

Accepted Answer

A)  on the run. 
B)  off the run. 
C)  on the market. 
D)  off the market. 
E)  none of these 
A)  on the run. 
B)  off the run. 
C)  on the market. 
D)  off the market. 
E)  none of these

Question 11

Answer the following questions that relate to bonds.
• A 2-year zero-coupon bond is selling for $890.00.What is the yield to maturity of this bond?
• The price of a 1-year zero coupon bond is $931.97.What is the yield to maturity of this bond?
• Calculate the forward rate for the second year.
• How can you construct a synthetic one-year forward loan (you are agreeing now to loan in one year)? State the strategy and show the corresponding cash flows.Assume that you can purchase and sell fractional portions of bonds.Show all calculations and discuss the meaning of the transactions.

Accepted Answer

Calculations are shown below.
• Calculat

Question 12

Which one of the following statements is true?

Accepted Answer

A)  The expectations hypothesis indicates a flat yield curve if anticipated future short-term rates exceed the current short-term rate. 
B)  The basic conclusion of the expectations hypothesis is that the long-term rate is equal to the anticipated long-term rate. 
C)  The liquidity preference hypothesis indicates that,all other things being equal,longer maturities will have lower yields. 
D)  The segmentation hypothesis contends that borrows and lenders are constrained to particular segments of the yield curve. 
E)  None of these. 
A)  The expectations hypothesis indicates a flat yield curve if anticipated future short-term rates exceed the current short-term rate. 
B)  The basic conclusion of the expectations hypothesis is that the long-term rate is equal to the anticipated long-term rate. 
C)  The liquidity preference hypothesis indicates that,all other things being equal,longer maturities will have lower yields. 
D)  The segmentation hypothesis contends that borrows and lenders are constrained to particular segments of the yield curve. 
E)  None of these.

Question 13

Although the expectations of increases in future interest rates can result in an upward sloping yield curve;an upward sloping yield curve does not in and of itself imply the expectations of higher future interest rates.Explain.

Accepted Answer

The effects of possible liquidity premiu

Question 14

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

Accepted Answer

A)  6.37% 
B)  9.00% 
C)  7.33% 
D)  10.00% 
E)  none of these 
A)  6.37% 
B)  9.00% 
C)  7.33% 
D)  10.00% 
E)  none of these

Question 15

Suppose that all investors expect that interest rates for the 4 years will be as follows: $$\begin{array} { c r } 
\text { Year } & \text { Forward Interest Rate } \
\hline 0& \text { (today) } 5 \% \
1 & 7 \% \
2 & 9 \% \
3 & 10 \%
\end{array}$$
What is the price of a 2-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000)

Accepted Answer

A)  $1,092.97 
B)  $1,054.24 
C)  $1,000.00 
D)  $1,073.34 
E)  none of these 
A)  $1,092.97 
B)  $1,054.24 
C)  $1,000.00 
D)  $1,073.34 
E)  none of these

Question 16

The market segmentation and preferred habitat theories of term structure

Accepted Answer

A)  are identical. 
B)  vary in that market segmentation is rarely accepted today. 
C)  vary in that market segmentation maintains that borrowers and lenders will not depart from their preferred maturities and preferred habitat maintains that market participants will depart from preferred maturities if yields on other maturities are attractive enough. 
D)  a and b. 
E)  b and c. 
A)  are identical. 
B)  vary in that market segmentation is rarely accepted today. 
C)  vary in that market segmentation maintains that borrowers and lenders will not depart from their preferred maturities and preferred habitat maintains that market participants will depart from preferred maturities if yields on other maturities are attractive enough. 
D)  a and b. 
E)  b and c.

Question 17

The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000. $$\begin{array} { c c } 
\text { Maturity (Years) } & \text { Price } \
\hline 1 & \$ 943.40 \
2 & \$ 881.68 \
3 & \$ 808.88 \
4 & \$ 742.09
\end{array}$$
You have purchased a 4-year maturity bond with a 10% coupon rate paid annually.The bond has a par value of $1,000.What would the price of the bond be one year from now if the implied forward rates stay the same?

Accepted Answer

A)  $808.88 
B)  $1,108.88 
C)  $1,000 
D)  $1,042.78 
E)  none of these 
A)  $808.88 
B)  $1,108.88 
C)  $1,000 
D)  $1,042.78 
E)  none of these

Question 18

Which of the following is not proposed as an explanation for the term structure of interest rates:

Accepted Answer

A)  The expectations theory. 
B)  The liquidity preference theory. 
C)  The market segmentation theory. 
D)  Modern portfolio theory. 
E)  A,b,and c. 
A)  The expectations theory. 
B)  The liquidity preference theory. 
C)  The market segmentation theory. 
D)  Modern portfolio theory. 
E)  A,b,and c.

Question 19

Which of the following theories state that the shape of the yield curve is essentially determined by the supply and demands for long-and short-maturity bonds?

Accepted Answer

A)  Liquidity preference theory. 
B)  Expectations theory. 
C)  Market segmentation theory. 
D)  All of these. 
E)  None of these. 
A)  Liquidity preference theory. 
B)  Expectations theory. 
C)  Market segmentation theory. 
D)  All of these. 
E)  None of these.

Question 20

The "break-even" interest rate for year n that equates the return on an n-period zero-coupon bond to that of an n-1-period zero-coupon bond rolled over into a one-year bond in year n is defined as

Accepted Answer

A)  the forward rate. 
B)  the short rate. 
C)  the yield to maturity. 
D)  the discount rate. 
E)  None of these. 
A)  the forward rate. 
B)  the short rate. 
C)  the yield to maturity. 
D)  the discount rate. 
E)  None of these.

Statistical estimation of the yield curve contains apparent pricing error.These error terms are probably a result of

If you have just purchased a 4-year zero coupon bond,what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000)

Investors can use publicly available financial date to determine which of the following? I.the shape of the yield curve II.future short-term rates III.the direction the S&P/TSX composite index is heading IV.the actions to be taken by the Bank of Canada

Discuss the two prevailing theories of the term structure of interest rates.Include in your discussion the differences in the theories,and the advantages/disadvantages of each.

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

The yield curve

Interest rates might decline

Suppose that all investors expect that interest rates for the 4 years will be as follows: Year Forward Interest Rate 0 (today) 5\% 1 7\% 2 9\% 3 10\% What is the yield to maturity of a 3-year zero coupon bond?

The most recently issued Treasury securities are called

Which one of the following statements is true?

Although the expectations of increases in future interest rates can result in an upward sloping yield curve;an upward sloping yield curve does not in and of itself imply the expectations of higher future interest rates.Explain.

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

Suppose that all investors expect that interest rates for the 4 years will be as follows: Year Forward Interest Rate 0 (today) 5\% 1 7\% 2 9\% 3 10\% What is the price of a 2-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000)

The market segmentation and preferred habitat theories of term structure

Which of the following is not proposed as an explanation for the term structure of interest rates:

Which of the following theories state that the shape of the yield curve is essentially determined by the supply and demands for long-and short-maturity bonds?

The "break-even" interest rate for year n that equates the return on an n-period zero-coupon bond to that of an n-1-period zero-coupon bond rolled over into a one-year bond in year n is defined as

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Exam 13: Equity Valuation

Statistical estimation of the yield curve contains apparent pricing error.These error terms are probably a result of

If you have just purchased a 4-year zero coupon bond,what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000)

Investors can use publicly available financial date to determine which of the following? I.the shape of the yield curve II.future short-term rates III.the direction the S&P/TSX composite index is heading IV.the actions to be taken by the Bank of Canada

Discuss the two prevailing theories of the term structure of interest rates.Include in your discussion the differences in the theories,and the advantages/disadvantages of each.

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

The yield curve

Interest rates might decline

Suppose that all investors expect that interest rates for the 4 years will be as follows: Year Forward Interest Rate 0 (today) 5\% 1 7\% 2 9\% 3 10\% What is the yield to maturity of a 3-year zero coupon bond?

The most recently issued Treasury securities are called

Which one of the following statements is true?

Although the expectations of increases in future interest rates can result in an upward sloping yield curve;an upward sloping yield curve does not in and of itself imply the expectations of higher future interest rates.Explain.

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

Suppose that all investors expect that interest rates for the 4 years will be as follows: Year Forward Interest Rate 0 (today) 5\% 1 7\% 2 9\% 3 10\% What is the price of a 2-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000)

The market segmentation and preferred habitat theories of term structure

Which of the following is not proposed as an explanation for the term structure of interest rates:

Which of the following theories state that the shape of the yield curve is essentially determined by the supply and demands for long-and short-maturity bonds?

The "break-even" interest rate for year n that equates the return on an n-period zero-coupon bond to that of an n-1-period zero-coupon bond rolled over into a one-year bond in year n is defined as

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yield

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Performance Evaluation and Active Portfolio Management

Globalization and International Investing

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Mutual Fund: Objectives, Types, NAV, Turnover Ratio, and More

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