Assume an Investor Has a Choice of 3 Consecutive One-Year

question 23

Multiple Choice

Assume an investor has a choice of 3 consecutive one-year bonds or one 3-year bond. Assuming the expectations hypothesis of the term structure of interest rates is correct the:

• A) average interest rate of the three consecutive one-year bonds should be less than the 3- year bond to reflect the risk premium.
• B) interest rate of the 3-year bond should equal the average interest rate of the 3 one-year bonds.
• C) three consecutive one-year bonds must have the same interest rate.
• D) current one-year interest rate must equal the current 3-year interest rate.

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Definitions:

Operating Activities

Transactions and events that are directly related to the primary operations of the company, such as sales and service delivery.

Indirect Method

A cash flow statement preparation approach that adjusts net income for changes in non-cash accounts to calculate cash flow from operating activities.

Gain on Sale

The profit earned from the sale of an asset or investment, calculated as the difference between the sale price and the original purchase price.

Operating Activities

The day-to-day actions that are involved in running a business and generating revenue, such as production, sales, and delivery of the company’s product and services.