Unit 6 Series 66
A common measurement used to evaluate attitudes regarding future economic conditions is the difference in yields between U.S. Treasury bonds and corporate bonds. This is known as A) the Consumer Price Index. B) a yield spread. C) a business cycle. D) a yield curve.
a yield spread.
During an economic recession, which of the following items will most likely increase? A) Bond prices B) Inflation C) Consumer confidence and profits D) Interest rates
Bond prices During a recessionary period, inflation and interest rates generally decline. This causes bond prices to increase because they are inversely related to the change in interest rates. Consumer confidence and profits are declining at this point in the economic cycle.
When analyzing the business cycle, you would expect which phase to occur before reaching the trough? A) Peak B) Contraction C) Expansion D) Recovery
Contraction
The research department of an investment advisory firm forecasts that the current business cycle should reach its peak within the next 2 months. Under such circumstances, which of the following portfolio adjustments would be most suitable for the firm's customers who actively invest in common stocks? A) Defensive stocks B) Cyclical stocks C) Aggressive growth stocks D) Corporate bonds
Defensive stocks
When discussing employment and production, which of the following industries are typically more affected by a recession? I)Capital goods II)Consumer durable goods III)Consumer nondurable goods IV)Services
I and II
Which of the following statements regarding the economics of fixed-income securities are true? I)Short-term interest rates are more volatile than long-term rates. II)Long-term interest rates are more volatile than short-term rates. III)Short-term bond prices react more than long-term bond prices given a change in interest rates. IV)Long-term bond prices react more than short-term bond prices given a change in interest rates. A) II and IV B) I and III C) I and IV D) II and III
I and IV
Some prominent stock market pundits are predicting that the economy will slide into a recession in the near future. Furthermore, they are expecting moderate deflation during the same period. If this were to happen, your clients would probably enjoy the greatest overall return from investing in A) real estate B) U.S. Treasury bonds C) common stock D) commodities
U.S. Treasury bonds
When investors tend to increase their investments in debt securities on the short end of the spectrum, it generally leads to A) a flat yield curve B) short-term yields that exceed long-term yields C) an inverted yield curve D) a positive yield curve
a positive yield curve Investors buying short-term debt rather than long-term debt will have the effect of driving the prices of short-term instruments up and, as a result, their yields down. This will produce a normal, or positive, yield. It is when the demand for bonds on the long end of the spectrum exceed demand for those in the near term that short-term yields exceed those of long-term yields. This creates an inverted or negative yield curve.
Yield curve analysis plays an important role as a benchmarking and forecasting tool for the future direction of interest rates. In most cases, this analysis involves examining bonds of A) varying quality of similar maturities. B) similar quality over varying maturities. C) a single issuer over varying maturities. D) varying quality over a number of maturities.
a single issuer over varying maturities.
A bond analyst notices that the yield spread between corporate bonds and government bonds is widening. This is typically predictive of A) increasing interest rates. B) an expanding economy. C) an economic slowdown. D) increased concern over the national debt.
an economic slowdown. A widening yield spread shows that the difference in yield between corporate bonds and U.S. Treasury bonds is increasing. This is usually caused by a flight to quality, the pattern of investors moving their investments to the safety of Treasury securities. This is commonly felt to be a prediction of a future recession or economic slowdown. During a slowdown, interest rates generally decline.
The contraction phase of the business cycle is least likely accompanied by A) decreasing unemployment. B) decreasing inflation pressure. C) decreasing business and consumer expenditures. D) low or negative economic growth.
decreasing unemployment. An economic contraction is likely to feature increasing unemployment (i.e., decreasing employment), along with declining economic output and decreasing inflationary pressure. Watch out for the double negatives.
Generally, an inverted yield curve is caused by A) declining interest rates. B) investors buying long-term bonds and selling short-term bonds. C) rising interest rates. D) investors buying short-term bonds and selling long-term bonds.
investors buying long-term bonds and selling short-term bonds. First of all, what is an inverted yield curve? That is what we get when the yields on short-term debt are higher than the yields on long-term debt.
A bond analyst reports that there is currently an inverted yield curve. That would mean A) the closer the bond is to its maturity date, the higher the yield. B) bonds with intermediate maturities have the highest yields. C) the further the bond is from its maturity date, the higher the yield. D) the closer the bond is to its maturity date, the lower the yield.
the closer the bond is to its maturity date, the higher the yield. An inverted yield curve shows near-term maturities with higher yields than those of long-term maturities. Sometimes called a negative yield curve, it is usually an indication that interest rates are near a peak and the trend should soon reverse.
