Question 1

The risk that interest rates will decline, and that decline will lead to a decline in the income provided by a bond portfolio as interest and maturity payments are reinvested, is called "reinvestment rate risk."

Accepted Answer

True

Question 2

Because the maturity risk premium is normally positive, the yield curve is normally upward sloping.

Accepted Answer

True

Question 3

The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) inflation.

Accepted Answer

True

Question 4

The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) weather conditions.

Accepted Answer

The answer of The four most fundamental factors that affect...

Question 5

Because the maturity risk premium is normally positive, the yield curve must have an upward slope. If you measure the yield curve and find a downward slope, you must have done something wrong.

Accepted Answer

The answer of Because the maturity risk premium is normally...

Question 6

If the demand curve for funds increased but the supply curve remained constant, we would expect to see the total amount of funds supplied and demanded increase and interest rates in general also increase.

Accepted Answer

The answer of If the demand curve for funds increased...

Question 7

One of the four most fundamental factors that affect the cost of money as discussed in the text is the expected rate of inflation. If inflation is expected to be relatively high, then interest rates will tend to be relatively low, other things held constant.

Accepted Answer

The answer of One of the four most fundamental factors...

Question 8

If the pure expectations theory is correct, a downward sloping yield curve indicates that interest rates are expected to decline in the future.

Accepted Answer

The answer of If the pure expectations theory is correct,...

Question 9

If investors expect a zero rate of inflation, then the nominal rate of return on a short-term U.S. Treasury bond should be equal to the real risk-free rate, r*.

Accepted Answer

The answer of If investors expect a zero rate of...

Question 10

One of the four most fundamental factors that affect the cost of money as discussed in the text is the current state of the weather. If the weather is dark and stormy, the cost of money will be higher than if it is bright and sunny, other things held constant.

Accepted Answer

The answer of One of the four most fundamental factors...

Question 11

One of the four most fundamental factors that affect the cost of money as discussed in the text is the time preference for consumption. The higher the time preference, the lower the cost of money, other things held constant.

Accepted Answer

The answer of One of the four most fundamental factors...

Question 12

An upward sloping yield curve is often call a "normal" yield curve, while a downward sloping yield curve is called "abnormal."

Accepted Answer

The answer of An upward sloping yield curve is often...

Question 13

The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called "interest rate risk," or "interest rate price risk."

Accepted Answer

The answer of The risk that interest rates will increase,...

Question 14

If the Treasury yield curve were downward sloping, the yield to maturity on a 10-year Treasury coupon bond would be higher than that on a 1-year T-bill.

Accepted Answer

The answer of If the Treasury yield curve were downward...

Question 15

During periods when inflation is increasing, interest rates tend to increase, while interest rates tend to fall when inflation is declining.

Accepted Answer

The answer of During periods when inflation is increasing, interest...

Question 16

One of the four most fundamental factors that affect the cost of money as discussed in the text is the risk inherent in a given security. The higher the risk, the higher the security's required return, other things held constant.

Accepted Answer

The answer of One of the four most fundamental factors...

Question 17

The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) the skill level of the economy's labor force.

Accepted Answer

The answer of The four most fundamental factors that affect...

Question 18

The "yield curve" shows the relationship between bonds' maturities and their yields.

Accepted Answer

The answer of The "yield curve" shows the relationship between...

Question 19

Since yield curves are based on a real risk-free rate plus the expected rate of inflation, at any given time there can be only one yield curve, and it applies to both corporate and Treasury securities.

Accepted Answer

The answer of Since yield curves are based on a...

Question 20

If investors expect the rate of inflation to increase sharply in the future, then we should not be surprised to see an upward sloping yield curve.

Accepted Answer

The answer of If investors expect the rate of inflation...

Quiz 6: Bonds and Their Valuation

The risk that interest rates will decline, and that decline will lead to a decline in the income provided by a bond portfolio as interest and maturity payments are reinvested, is called "reinvestment rate risk."

Because the maturity risk premium is normally positive, the yield curve is normally upward sloping.

The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) inflation.

The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) weather conditions.

Because the maturity risk premium is normally positive, the yield curve must have an upward slope. If you measure the yield curve and find a downward slope, you must have done something wrong.

If the demand curve for funds increased but the supply curve remained constant, we would expect to see the total amount of funds supplied and demanded increase and interest rates in general also increase.

One of the four most fundamental factors that affect the cost of money as discussed in the text is the expected rate of inflation. If inflation is expected to be relatively high, then interest rates will tend to be relatively low, other things held constant.

If the pure expectations theory is correct, a downward sloping yield curve indicates that interest rates are expected to decline in the future.

If investors expect a zero rate of inflation, then the nominal rate of return on a short-term U.S. Treasury bond should be equal to the real risk-free rate, r*.

One of the four most fundamental factors that affect the cost of money as discussed in the text is the current state of the weather. If the weather is dark and stormy, the cost of money will be higher than if it is bright and sunny, other things held constant.

One of the four most fundamental factors that affect the cost of money as discussed in the text is the time preference for consumption. The higher the time preference, the lower the cost of money, other things held constant.

An upward sloping yield curve is often call a "normal" yield curve, while a downward sloping yield curve is called "abnormal."

The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called "interest rate risk," or "interest rate price risk."

If the Treasury yield curve were downward sloping, the yield to maturity on a 10-year Treasury coupon bond would be higher than that on a 1-year T-bill.

During periods when inflation is increasing, interest rates tend to increase, while interest rates tend to fall when inflation is declining.

One of the four most fundamental factors that affect the cost of money as discussed in the text is the risk inherent in a given security. The higher the risk, the higher the security's required return, other things held constant.

The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) the skill level of the economy's labor force.

The "yield curve" shows the relationship between bonds' maturities and their yields.

Since yield curves are based on a real risk-free rate plus the expected rate of inflation, at any given time there can be only one yield curve, and it applies to both corporate and Treasury securities.

If investors expect the rate of inflation to increase sharply in the future, then we should not be surprised to see an upward sloping yield curve.