11) If bonds with different maturities are perfect substitutes, then the ________ on these bonds must be equal.
A) expected return
B) surprise return
C) surplus return
D) excess return

The answer is A) expected return. If bonds with different maturities are perfect substitutes, then investors would expect the same return on these bonds.

12) If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five-year bond is
A) 4 percent.
B) 5 percent.
C) 6 percent.
D) 7 percent.

The answer is D) 7 percent. According to the expectations theory, the interest rate on a long-term bond is equal to the average of the expected short-term interest rates over the bond's maturity. In this case, the average of the expected one-year interest rates over the next five years is 6 percent, so the interest rate on the five-year bond would be 7 percent.

13) If the expected path of 1-year interest rates over the next four years is 5 percent, 4 percent, 2 percent, and 1 percent, then the expectations theory predicts that today's interest rate on the four-year bond is
A) 1 percent.
B) 2 percent.
C) 3 percent.
D) 4 percent.

The answer is B) 2 percent. Using the expectations theory, the interest rate on a four-year bond is equal to the average of the expected one-year interest rates over the bond's maturity. In this case, the average of the expected one-year interest rates over the next four years is 3 percent, so the interest rate on the four-year bond would be 2 percent.

14) If the expected path of 1-year interest rates over the next five years is 1 percent, 2 percent, 3 percent, 4 percent, and 5 percent, the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of
A) two years.
B) three years.
C) four years.
D) five years.

The answer is D) five years. According to the expectations theory, the bond with the highest interest rate today is the one with the longest maturity. In this case, the five-year bond has the highest interest rate.

15) If the expected path of 1-year interest rates over the next five years is 2 percent, 4 percent, 1 percent, 4 percent, and 3 percent, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of
A) one year.
B) two years.
C) three years.
D) four years.

The answer is C) three years. According to the expectations theory, the bond with the lowest interest rate today is the one with the shortest maturity. In this case, the three-year bond has the lowest interest rate.

16) Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1 percent. The expectations theory of the term structure predicts that the current interest rate on 3-year bond is
A) 1 percent.
B) 2 percent.
C) 3 percent.
D) 4 percent.

The answer is C) 3 percent. According to the expectations theory, the interest rate on a long-term bond is equal to the average of the expected short-term interest rates over the bond's maturity. In this case, the average of the expected one-year interest rates over the next three years is 2 percent, so the interest rate on the three-year bond would be 3 percent.

17) According to the expectations theory of the term structure
A) the interest rate on long-term bonds will exceed the average of short-term interest rates that people expect to occur over the life of the long-term bonds, because of their preference for short-term securities.
B) interest rates on bonds of different maturities move together over time.
C) buyers of bonds prefer short-term to long-term bonds.
D) buyers require an additional incentive to hold long-term bonds.

The answer is B) interest rates on bonds of different maturities move together over time. According to the expectations theory, the interest rates on bonds of different maturities are interrelated and tend to move together.

18) According to the expectations theory of the term structure
A) when the yield curve is steeply upward sloping, short-term interest rates are expected to remain relatively stable in the future.
B) when the yield curve is downward sloping, short-term interest rates are expected to remain relatively stable in the future.
C) investors have strong preferences for short-term relative to long-term bonds, explaining why yield curves typically slope upward.
D) yield curves should be equally likely to slope downward as slope upward.

The answer is A) when the yield curve is steeply upward sloping, short-term interest rates are expected to remain relatively stable in the future. According to the expectations theory, a steeply upward sloping yield curve indicates that short-term interest rates are expected to remain stable in the future.

19) According to the segmented markets theory of the term structure
A) bonds of one maturity are close substitutes for bonds of other maturities, therefore, interest rates on bonds of different maturities move together over time.
B) the interest rate for each maturity bond is determined by supply and demand for that maturity bond.
C) investors' strong preferences for short-term relative to long-term bonds explains why yield curves typically slope downward.
D) because of the positive term premium, the yield curve will not be observed to be downward-sloping.

The answer is B) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. According to the segmented markets theory, interest rates on bonds of different maturities are determined by the supply and demand dynamics specific to each maturity.

20) According to the segmented markets theory of the term structure
A) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds.
B) buyers of bonds do not prefer bonds of one maturity over another.
C) interest rates on bonds of different maturities do not move together over time.
D) buyers require an additional incentive to hold long-term bonds.

The answer is C) interest rates on bonds of different maturities do not move together over time. According to the segmented markets theory, interest rates on bonds of different maturities are determined independently and do not necessarily move together over time.

Question

11) If bonds with different maturities are perfect substitutes, then the ________ on these bonds must be equal.
A) expected return
B) surprise return
C) surplus return
D) excess return

The answer is A) expected return. If bonds with different maturities are perfect substitutes, then investors would expect the same return on these bonds.

12) If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five-year bond is
A) 4 percent.
B) 5 percent.
C) 6 percent.
D) 7 percent.

The answer is D) 7 percent. According to the expectations theory, the interest rate on a long-term bond is equal to the average of the expected short-term interest rates over the bond's maturity. In this case, the average of the expected one-year interest rates over the next five years is 6 percent, so the interest rate on the five-year bond would be 7 percent.

13) If the expected path of 1-year interest rates over the next four years is 5 percent, 4 percent, 2 percent, and 1 percent, then the expectations theory predicts that today's interest rate on the four-year bond is
A) 1 percent.
B) 2 percent.
C) 3 percent.
D) 4 percent.

The answer is B) 2 percent. Using the expectations theory, the interest rate on a four-year bond is equal to the average of the expected one-year interest rates over the bond's maturity. In this case, the average of the expected one-year interest rates over the next four years is 3 percent, so the interest rate on the four-year bond would be 2 percent.

14) If the expected path of 1-year interest rates over the next five years is 1 percent, 2 percent, 3 percent, 4 percent, and 5 percent, the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of
A) two years.
B) three years.
C) four years.
D) five years.

The answer is D) five years. According to the expectations theory, the bond with the highest interest rate today is the one with the longest maturity. In this case, the five-year bond has the highest interest rate.

15) If the expected path of 1-year interest rates over the next five years is 2 percent, 4 percent, 1 percent, 4 percent, and 3 percent, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of
A) one year.
B) two years.
C) three years.
D) four years.

The answer is C) three years. According to the expectations theory, the bond with the lowest interest rate today is the one with the shortest maturity. In this case, the three-year bond has the lowest interest rate.

16) Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1 percent. The expectations theory of the term structure predicts that the current interest rate on 3-year bond is
A) 1 percent.
B) 2 percent.
C) 3 percent.
D) 4 percent.

The answer is C) 3 percent. According to the expectations theory, the interest rate on a long-term bond is equal to the average of the expected short-term interest rates over the bond's maturity. In this case, the average of the expected one-year interest rates over the next three years is 2 percent, so the interest rate on the three-year bond would be 3 percent.

17) According to the expectations theory of the term structure
A) the interest rate on long-term bonds will exceed the average of short-term interest rates that people expect to occur over the life of the long-term bonds, because of their preference for short-term securities.
B) interest rates on bonds of different maturities move together over time.
C) buyers of bonds prefer short-term to long-term bonds.
D) buyers require an additional incentive to hold long-term bonds.

The answer is B) interest rates on bonds of different maturities move together over time. According to the expectations theory, the interest rates on bonds of different maturities are interrelated and tend to move together.

18) According to the expectations theory of the term structure
A) when the yield curve is steeply upward sloping, short-term interest rates are expected to remain relatively stable in the future.
B) when the yield curve is downward sloping, short-term interest rates are expected to remain relatively stable in the future.
C) investors have strong preferences for short-term relative to long-term bonds, explaining why yield curves typically slope upward.
D) yield curves should be equally likely to slope downward as slope upward.

The answer is A) when the yield curve is steeply upward sloping, short-term interest rates are expected to remain relatively stable in the future. According to the expectations theory, a steeply upward sloping yield curve indicates that short-term interest rates are expected to remain stable in the future.

19) According to the segmented markets theory of the term structure
A) bonds of one maturity are close substitutes for bonds of other maturities, therefore, interest rates on bonds of different maturities move together over time.
B) the interest rate for each maturity bond is determined by supply and demand for that maturity bond.
C) investors' strong preferences for short-term relative to long-term bonds explains why yield curves typically slope downward.
D) because of the positive term premium, the yield curve will not be observed to be downward-sloping.

The answer is B) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. According to the segmented markets theory, interest rates on bonds of different maturities are determined by the supply and demand dynamics specific to each maturity.

20) According to the segmented markets theory of the term structure
A) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds.
B) buyers of bonds do not prefer bonds of one maturity over another.
C) interest rates on bonds of different maturities do not move together over time.
D) buyers require an additional incentive to hold long-term bonds.

The answer is C) interest rates on bonds of different maturities do not move together over time. According to the segmented markets theory, interest rates on bonds of different maturities are determined independently and do not necessarily move together over time.

Knowee AI · Accepted Answer