Interest Rates, Ch 15
When computing yield to maturity, the implicit reinvestment assumption is that the interest payments are reinvested at the:
Yield to maturity at the time of the investment.
The on the run yield curve is
a plot of yield as a function of maturity for recently issued coupon bonds trading at or near par.
If the value of a Treasury bond was higher than the value of the sum of its parts (STRIPPED cash flows)
arbitrage would probably occur.
If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows)
arbitrage would probably occur.
Bond stripping and bond reconstitution offer opportunities for ______, which can occur if the _________ is violated.
arbitrage; Law of One Price
The value of a Treasury bond should
be equal to the sum of the value of STRIPS created from it.
______ can occur if _____.
both arbitrage; the Law of One Price is violated and riskless economic profit; the Law of One Price is violated
The pure yield curve can be estimated
by using zero-coupon Treasuries and by using stripped Treasuries if each coupon is treated as a separate zero.
Treasury STRIPS are
created by selling each coupon or principal payment from a whole Treasury bond as a separate cash flow.
Forward rates ____________ future short rates because ____________.
differ from; they are imperfect forecasts.
An inverted yield curve is one
that slopes downward.
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
the forward rate.
The yield curve is a component of
the index of leading economic indicators.
An upward sloping yield curve
All of these are correct.
Which of the following combinations will result in a sharply increasing yield curve?
Increasing future expected short rates and increasing liquidity premiums
An inverted yield curve implies that:
Long-term interest rates are lower than short-term interest rates.
Which of the following is not proposed as an explanation for the term structure of interest rates?
Modern portfolio theory.
The term structure of interest rates is
The relationship between the interest rate on a security and its time to maturity.
The yield curve shows at any point in time:
The relationship between yield on a bond and the time to maturity on the bond.
Investors can use publicly available financial data to determine which of the following?
The shape of the yield curve and Expected future short-term rates (if liquidity premiums are ignored) ( 1&2)
The expectations theory of the term structure of interest rates states that
forward rates are determined by investors expectations of future interest rates.
According to the expectations hypothesis, an upward sloping yield curve implies that
interest rates are expected to increase in the future.
The yield curve
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.
An upward sloping yield curve is a(n) _______ yield curve.
normal.
If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows) you could
not profit by buying the stripped cash flows and reconstituting the bond and profit by buying the bond and creating STRIPS
If the value of a Treasury bond was higher than the value of the sum of its parts (STRIPPED cash flows) you could
not profit by buying the stripped cash flows and reconstituting the bond but profit by buying the bond and creating STRIPS
The most recently issued Treasury securities are called
on the run.
