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215Chapter3____________________________________StructureofInterestRates1.DefaultriskislikelytobehighestforA)short-termTreasurysecurities.B)AAAcorporatesecurities.C)long-termTreasurysecurities.D)BBBcorporatesecurities.ANSWER:D2.Ifasecuritycaneasilybeconvertedtocashwithoutalossinvalue,itA)isliquid.B)hasahighafter-taxyield.C)hashighdefaultrisk.D)isilliquid.ANSWER:A3.Ifallothercharacteristicsaresimilar,______wouldhavetooffer______.A)taxablesecurities;ahigherafter-taxyieldthantax-exemptsecuritiesB)taxablesecurities;ahigherbefore-taxyieldthantax-exemptsecuritiesC)tax-exemptsecurities;ahigherafter-taxyieldthantaxablesecuritiesD)tax-exemptsecurities;ahigherbefore-taxyieldthantaxablesecuritiesANSWER:B4.Assumeaninvestor’staxrateis25percent.Thebefore-taxyieldonasecurityis12percent.Whatistheafter-taxyield?A)16.00percentB)9.25percentC)9.00percentD)3.00percentE)noneoftheaboveANSWER:C216Chapter3/StructureofInterestRates5.Aninvestor’staxrateis30percent.Whatmustthebefore-taxyieldonasecuritybetohaveanafter-taxyieldof11percent?A)7.7percentB)15.71percentC)130percentD)11.00percentE)noneoftheaboveANSWER:B6.Holdingotherfactorssuchasriskconstant,therelationshipbetweenthematurityandannualizedyieldofsecuritiesiscalledtheA)termstructureofinterestrates.B)defaultstructureofinterestrates.C)liquiditystructureofinterestrates.D)taxstructureofinterestrates.E)noneoftheaboveANSWER:A7.Ifshortertermsecuritieshavehigherannualizedyieldsthanlongertermsecurities,theyieldcurveA)ishorizontal.B)isupwardsloping.C)isdownwardsloping.D)cannotbedeterminedunlessweknowadditionalinformation(suchasthelevelofmarketinterestrates).ANSWER:C8.Assumethatannualizedyieldsofshort-termandlong-termsecuritiesareequal.Ifinvestorssuddenlybelieveinterestrateswillincrease,theiractionsmaycausetheyieldcurvetoA)becomeinverted.B)becomeflat.C)becomeupwardsloping.D)beunaffected.ANSWER:C9.Ifissuersofsecurities(borrowers)andinvestorssuddenlyexpectinterestratestodecrease,theiractionstobenefitfromtheirexpectationsshouldcauseA)long-termyieldstorise.B)short-termyieldstodecrease.C)pricesoflong-termsecuritiestodecrease.D)AandBE)noneoftheaboveANSWER:E10.ThetheoryforthetermstructureofinterestratesthatsaystheshapeoftheyieldcurveisdeterminedsolelybyexpectationsoffutureinterestratesiscalledtheChapter3/StructureofInterestRates217A)segmentedmarketstheory.B)liquiditypremiumtheory.C)pureexpectationstheory.D)theoryofrationalexpectations.ANSWER:C11.Assumeinvestorsareindifferentamongsecuritymaturities.Today,theannualized2-yearinterestrateis12percent,andthe1-yearinterestrateis9percent.Whatistheforwardrateaccordingtothepureexpectationstheory?A)15.08percentB)3.00percentC)12.00percentD)12.62percentE)11.41percentANSWER:A12.ThedegreetowhichtheTreasury’sdebtmanagementpolicycouldaffectthetermstructureofinterestratesisgreatestifA)mostdebtisfinancedbyforeigninvestors.B)theTreasury’sdebtlevelissmall.C)maturitymarketsaresegmented.D)aandb.ANSWER:C13.Accordingtothepureexpectationstheoryofthetermstructureofinterestrates,the______thedifferencebetweentheimpliedone-yearforwardrateandtoday’sone-yearinterestrate,the______istheexpectedchangeintheone-yearinterestrate.A)greater;lessB)less;greaterC)greater;greaterD)less;lessE)canddANSWER:E14.Assumethattoday,theannualizedtwo-yearinterestrateis12percent,andtheone-yearinterestrateis9percent.Athree-yearsecurityhasanannualizedinterestrateof14percent.Whatistheone-yearforwardratetwoyearsfromnow?A)12.67percentB)113percentC)195percentD)15.67percentE)noneoftheaboveANSWER:E15.Assumethatayieldcurveisinfluencedbyinterestrateexpectationsandaliquiditypremium.Assumetheyieldcurveisinitiallyflat.Ifliquiditysuddenlywasnolongerimportant,theyieldcurvewould218Chapter3/StructureofInterestRatesnowhavea______(assumingnootherchanges).A)slightdownwardslopeB)slightupwardslopeC)steepupwardslopeD)steepdownwardslopeANSWER:A16.Accordingtotheliquiditypremiumtheory,theexpectedyieldonatwo-yearsecuritywill______theexpectedyieldfromconsecutiveinvestmentsinone-yearsecurities.A)equalB)belessthanC)begreaterthanD)bandcarepossible,dependingonthesizeoftheliquiditypremiumANSWER:C17.Ifliquidityinfluencestheyieldcurve,butisnotconsideredwhenderivingtheforwardinterestrate,theforwardinterestrate______themarket’sexpectationofthefutureinterestrate.A)overestimatesB)accuratelyestimatesC)underestimatesD)isanunbiasedforecastof(ithasanequalchanceofoverestimatingorunderestimating)ANSWER:A18.Iftheliquiditypremiumexists,aflatyieldcurvewouldbeinterpretedasthemarketexpecting______ininterestrates.A)nochangesB)aslightdecreaseC)aslightincreaseD)alargeincreaseANSWER:B19.Thetheoryofthetermstructureofinterestrates,whichstatesthatinvestorsandborrowerschoosesecuritieswithmaturitiesthatsatisfytheirforecastedcashneeds,istheA)pureexpectationstheory.B)liquiditypremiumtheory.C)segmentedmarketstheory.D)liquidityhabitattheory.ANSWER:CChapter3/StructureofInterestRates21920.Accordingtothesegmentedmarketstheory,ifmostinvestorssuddenlypreferredtoinvestinshort-termsecuritiesandmostborrowerssuddenlypreferredtoissuelong-termsecuritiestherewouldbeA)upwa