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Structure of Interest Rates
Structure of Interest Rates MCQs
?
Empirical evidence of the term structure of interest rates shows that
the yield on long-term bonds is usually lower than the yield on short-term bonds.
the yield on long-term bonds is usually higher than the yield on short-term bonds.
Government bonds have a lower rate of return than corporate bonds because the latter are riskier.
on average interest rates on Guaranteed investment certificates (GICs) are higher than the interest rate offered on Canada savings bonds (CSBs).
?
The expectations hypothesis states that
future interest rates can be forecasted by looking at the term structure of interest rates because the return on a long-term bond is essentially the average return on short-term bonds over the same period.
future interest rates can be forecasted by looking at the term structure of interest rates because the return on a short-term bond is essentially the average return on long-term bonds over the same period.
future interest rates can be forecasted by looking at past returns on similar instruments.
future interest rates can be forecasted by looking at the behaviour of the stock market
?
According to the expectations hypothesis, what would be the annual yield of a three-year government bond if the annual yield of a one-year government ...
8%
8.2%
8.5%
9%
?
Plots of the yield curve can be useful for
predicting the future course of inflation.
predicting the future trends in international trade.
predicting the future course of interest rates.
prediction the future policy actions of the Bank of Canada.
?
An upward sloping yield curve means that
short-term interest rates are expected to fall, so that long-term interest rates will be higher than short-term interest.
short-term interest rates are expected to rise, so that short-term interest rates will be higher than long-term interest.
short-term interest rates are expected to rise, so that long-term interest rates will be higher than short-term interest.
short-term interest rates are expected to fall, so that short-term interest rates will be lower than long-term interest.
?
What happens to the yield curve if there is a rise in expected inflation?
The curve becomes flatter.
The curve becomes steeper.
The curve shifts up.
the yield curve shifts down.
?
According to a study by Mishkin (1991) on the Expectations Hypothesis, the term structure of interest rates provides good forecasts about real interes...
6 months or less.
between 6 months and 1 year.
between 1 year and 5 years.
more than 5 years.
?
On one hand, investors believe that inflation will be lower in the future. On the other hand, the Bank of Canada believes that inflation will be highe...
nominal interest rates decrease and real interest rates will increase
nominal interest rates decrease and real interest rates will decrease
nominal interest rates increase and real interest rates will increase
nominal interest rates increase and real interest rates will decrease
?
According to recent studies by Bonser-Neal and Morley, and Estrella and Mishkin (1997), the dominant pieces of information contained in the slope of t...
the relationship between inflation and the yield spread, and the yield spread’s ability to predict future recessions.
the ability to predict the future course of monetary policy and the bank rate.
the ability to predict future trade patterns between Canada and the rest of the world, and also trade deficits.
the ability to track the future course of exchange rates and trade deficits.
?
Which of the following is not a counterpoint to the Expectations Hypothesis?
investors do have preferences for short-term and long-term bonds.
long-term and short-term bonds are not perfect substitutes.
many forces simultaneously affect the curve and its size.
the yield curve is useful in understanding how the government manages its debt.
?
Which of the following is not a stylized fact about the yield curve:
The yield curve is generally upward sloping
The yield curve is generally downward sloping
The yield curve tends to shift over time
The yield curve tends tend to predict future economic activity
?
If the Expectations Hypothesis holds true about long-term and short-term bonds being substitutes, then if the government of Canada decides to issue a ...
the yield curve to become steeper
the yield curve to become flatter
the yield curve to shift down
the yield curve to shift up
?
Suppose that businesses believe that the economy is about to expand, then we could expect
the yield curve to become steeper
the yield curve to become flatter
the yield curve to shift down
the yield curve to shift up
?
According to the Liquidity Premium Theory, a premium must be paid to entice investors to hold short-term (less yielding) bonds as opposed to long term...
True
False
?
The yield curve that is predicted by the Liquidity Premium Theory is ___________ than the one predicted by the Expectations Hypothesis.
steeper
flatter
the same
lower
?
According to the Market Segmentation Theory, long-term and short-term bonds
should have the same yield
are perfect substitutes
are not substitutes
are somewhat substitutable.
?
According to the Preferred Habitat Theory, long-term and short-term bonds
should have the same yield.
are perfect substitutes.
are not substitutes.
are somewhat substitutable.
?
Empirical evidence in Canada shows that when the spread between long term bonds and short term bonds is negative than one can expect
higher inflation.
lower inflation.
a recession.
an economic expansion.
?
According to the pure expectations theory of term structure, a flat yield curve is interpreted to mean that
Interest rates are expected to rise.
Interest rates are expected to fall.
Interest rates are expected to remain constant.
Interest rates are expected to rise and then to fall.
?
The yield on a 10-year government bond yield is 7%, whereas that on a one-year government bond is 5%. The yield differential
Is because of higher default risk of the long-term bond.
Reflects that the market expects the short-term interest rates to go down.
Reflects the existence of a term premium.
Is negative two percent.
