Question 1

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

Accepted Answer

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.F) A) and B)
G) All of the above

Question 2

One of the four most fundamental factors that affect the cost of money as discussed in the text is the availability of production opportunities and their expected rates of return. If production opportunities are relatively good, then interest rates will tend to be relatively high, other things held constant.

Accepted Answer

A) True 
 B)False

Exam 6: Interest Rates

Correct Answer
verified

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

Correct Answer
verified

Exam 6: Interest Rates

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified