18) Which of the following statements is false: A) The expectations hypothesis of the term structure of interest rates states that the long-term interest rate should be approximately equal to the sum of expected short-term interest rates over the contract horizon. B) The Gordon Growth Formula predicts that the price-dividend ratio fluctuates due to changes in interest rate and/or dividend growth rate. C) Fluctuations in the stock market depend only on investor expectations of future dividends. D) Bank runs can sometimes be prevented through deposit insurance. E) If the term structure of interest rates does not change, the price of zero-coupon bonds will increase over time.

18) Which of the following statements is false: A) The expectations hypothesis of the term structure of interest rates states that the long-term interest rate should be approximately equal to the sum of expected short-term interest rates over the contract horizon. B) The Gordon Growth Formula predicts that the price-dividend ratio fluctuates due to changes in interest rate and/or dividend growth rate. C) Fluctuations in the stock market depend only on investor expectations of future dividends. D) Bank runs can sometimes be prevented through deposit insurance. E) If the term structure of interest rates does not change, the price of zero-coupon bonds will increase over time.

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

8th Edition

ISBN:9781285065137

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter8: Risk And Rates Of Return

Section: Chapter Questions

Problem 9Q: In Chapter 7, we saw that if the market interest rate, rd, for a given bond increased, the price of...

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Which one of the following statements about the term structure of interest rates is true? A) The expectations hypothesis predicts a flat yield curve if anticipated future short-term rates exceed current short-term rates. B) The liquidity premium theory contends that lenders prefer to buy securities at the ghort-term end of the curve. C) The expectations hypothesis contends that the long-term spot rate is equal to the short-term rate. D) The liquidity premium theory indicates that, all else being equal, longer maturity bonds will have lower yields.
Assume that inflation is expected to steadily increase in the years ahead, but that the real risk-free rate r*, is expected to remain constant. Which of the following statements is most correct? None of the answers are correct. The treasury yield curve must be upward sloping. If the expectations theory holds, the treasury yield curve must be downward sloping. If the expectations theory holds, the yield curve for corporate securities must be downward sloping.
Which of the following is correct with regards to Theories of Term Structure? When the shape of the yield curve depends on investors’ expectations about prospective prevailing interest rates, the Pure Exception Theory is being applied. When the economic outlook is improving, the yield curve inverts as it reflects no changes in inflation premium. The liquidity preference theory suggests that long-term rates are generally higher than short-term rates since investors perceive more liquidity in long-term investments. Under the Market segmentation theory, there is an apparent relationship between the yield curve and the prevailing rate of returns in each market segment.
Which one of the following statements about the term structure of interest rates is true?a. The expectations hypothesis indicates a flat yield curve if anticipated future short-term rates exceed current short-term rates.b. The expectations hypothesis contends that the long-term rate is equal to the anticipated short-term rate.c. The liquidity premium theory indicates that, all else being equal, longer maturities will have lower yields.d. The liquidity preference theory contends that lenders prefer to buy securities at the short end of the yield curve.
Which of the following statements is true? If investors believe inflation will be subsiding in the future, the prevailing yield curve will have a positive slope. The longer the maturity of a security, the greater its interest rate risk. The interest rate risk premium always adds a downward bias to the slope of the yield curve. The real rate of interest varies with the business cycle, with the lowest rates at the end of a period of business expansion and the highest at the bottom of a recession.
22. If the expectations theory of the term structure of interest rates is correct, and if the otherterm structure theories are invalid, and we observe a downward sloping yield curve, which ofthe following is a true statement?a.Investors expect short-term rates to be constant over time.b.Investors expect short-term rates to increase in the future.c.Investors expect short-term rates to decrease in the future.d.It is impossible to say unless we know whether investors require a positive ornegative maturity risk premium.e.The maturity risk premium must be positive 23. Other things held constant, which of the following will not affect the quick ratio? (Assumethat current assets equal current liabilities.)a.Fixed assets are sold for cash.b.Cash is used to purchase inventories.c.Cash is used to pay off accounts payable.d.Accounts receivable are collected.e.Long-term debt is issued to pay off a short-term bank loan.
Consider the following scenario analysis A. Is it reasonable to assume that treasury bonds will provide higher returns in recessions than in booms? B. Calculate the expected rate of return and standard deviation for each investment. C. What investment would you prefer?
At any point in time forward rates computed by the yield curve represent the market's best estimates about the future course of short-term interest rates. Hence, for an individual investor who has a one-period investment horizon, it makes no difference what the term to maturity is on the individual security purchased. True/false?
Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? Calculate the expected rate of return and standard deviation for each investment. Which investment would you prefer?
Which of the following statements is correct? A.) A flat yield curve occurs when the yield-to-maturity is virtually unaffected by the term-to-maturity. B.) Real interest rates are generally lower than nominal interest rates. C.) Liquidity risk is the risk that a security may be difficult to sell on short notice for its true value. D.) All of these statements are correct.
Assess the following statements: The traditional liquidity premium theory states that long term interest rates are greater than the average of expected future interest rates. According to the market segmentation theory short term investors will not normally switch to intermediate or long term investments. The liquidity premium theory of interest rates states that the term structure must always be upward sloping. The liquidity premium theory of interest rates states that investors are indifferent between different maturities if the long term spot rates are equal to the average of current and expected future short term rates. a. Two statements are correct. b. Three statements are correct. c. Only one statement is correct. d. Four statements are correct.
Which of the following statements is CORRECT about the yield curve? A) The yield curve shows the behaviour of interest rate forecasts. B) When short-term rates are lower than long-term rates, there is a downward-sloping yield curve. C) A downward-sloping yield curve shows that investors demand an additional risk premium for lending money over the long term. D) A downward-sloping yield curve indicates that the market expects a future rise in interest rates.