If the Pure Expectations Theory of the Term Structure Is

question 4

Multiple Choice

If the pure expectations theory of the term structure is correct,which of the following statements would be CORRECT?

• A) An upward-sloping yield curve would imply that interest rates are expected to be lower in the future.
• B) If a 1-year Treasury bill has a yield to maturity of 7% and a 2-year Treasury bill has a yield to maturity of 8%,this would imply the market believes that 1-year rates will be 7.5% one year from now.
• C) The yield on a 5-year corporate bond should always exceed the yield on a 3-year Treasury bond.
• D) Interest rate (price)risk is higher on long-term bonds,but reinvestment rate risk is higher on short-term bonds.
• E) Interest rate (price)risk is higher on short-term bonds,but reinvestment rate risk is higher on long-term bonds.

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Definitions:

Production Function

An economic model expressing the relationship between inputs (like labor and capital) and the quantity of output produced.

Profit Maximization

The process or strategy of adjusting the production and sale of goods and services to achieve the highest possible profit levels.

Production Function

An equation that describes the relationship between the inputs used in production and the output generated from those inputs.

Marginal Product

The additional output produced as a result of using one more unit of a particular input, holding all other inputs constant.