The Expression 'Term Structure of Interest Rates

question 17

Multiple Choice

The expression 'term structure of interest rates':

• A) reflects the differing tax treatment received by different securities.
• B) represents the variation in yields for similar instruments differing in maturity.
• C) always results in an upward-sloping yield curve.
• D) generally results in a downward-sloping yield curve.

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Definitions:

Effective Interest Method

A technique used in accounting to allocate the interest expense or income over the life of a financial instrument such as a bond or a loan.

Bond Premium

The amount by which the market price of a bond exceeds its face value, often because it offers an interest rate higher than the current market rates.

Callable Bond

A type of bond that gives the issuer the right to repay the bond before its maturity date at a predetermined call price.

Term Bond

A bond that reaches its maturity date at the same time, where the principal amount is due in a lump sum at the end.