Assuming the Pure Expectations Theory Is Correct,which of the Following

question 49

Multiple Choice

Assuming the pure expectations theory is correct,which of the following statements is CORRECT?

• A) If 2-year Treasury bond rates exceed 1-year rates,then the market must expect interest rates to rise.
• B) If both 2-year and 3-year Treasury rates are 7%,then 5-year rates must also be 7%.
• C) If 1-year rates are 6% and 2-year rates are 7%,then the market expects 1-year rates to be 6.5% in one year.
• D) Reinvestment rate risk is higher on long-term bonds,and interest rate (price)risk is higher on short-term bonds.
• E) Interest rate (price)risk and reinvestment rate risk are relevant to investors in corporate bonds,but these concepts do not apply to Treasury bonds.

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Definitions:

Amortization

The process of spreading the cost of intangible assets over their useful life, or gradually paying off debt through a series of fixed payments.

Research Costs

Expenses associated with activities undertaken to discover new knowledge, develop new products or processes, without assurance of commercial success.

Expensed

Costs that are charged against income in the period they are incurred, rather than being capitalized and amortized over time.

Finite Life

Finite life refers to the fixed period during which an asset is expected to be useful before it becomes obsolete or its value is fully depreciated.