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:

Resistance Point

The least favorable position on an issue that one is willing to accept during a negotiation process.

Bidding War

A competitive situation where multiple parties repeatedly outbid each other to win something, often seen in auctions or real estate markets.

Phase Model

A framework that outlines sequential stages or steps in a process or activity.

Problem Solving

The process of finding solutions to difficult or complex issues.