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.

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.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter9: Forecasting Exchange Rates

Section: Chapter Questions

Problem 5BIC

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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 of the following best explains an upward sloping Treasury yield curve? A. Maturity risk is expected to decline in the future B. Long-term interest rates are more volatile than short-term rates C. Inflation risk premiums are higher for longer terms to maturity D. Default risk is higher for longer terms to maturity
Under the expectations hypothesis, if the yield curve is upward-sloping, the market must expect an increase in short-term interest rates. True/false/uncertain? Why?
Assuming the pure expectations theory is correct, an upward-sloping yield curve implies:a. Interest rates are expected to increase in the future.b. Longer-term bonds are riskier than short-term bonds.c. Interest rates are expected to decline in the future.
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.
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.
If the yield curve is downward sloping, what would the expectations theory suggest about expected future short-term interest rates?
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?
What can you tell just by looking at the above yield curve? Group of answer choices An expectation of falling interest rates suggests trouble in the economy, a rise in bond prices, and a decline for stocks. The economy is expected to do well in the short-run. A correction in bond prices is expected. Bond prices are expected to decline and so the stock market should do extremely well.
Determine whether the following statements are TRUE or FALSE. Briefly explain your answers. (a) “When a consol is priced above its par value, the yield to maturity equals coupon rate.” (b) "If the actual inflation rate is higher than expected, both borrowers and lenders will lose"
According to the ,long-term interest rates are a function of expected short-term interest rates Maturity theory Expectations theory Market segmentation theory Preferred habitat theory