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Questions and Answers
The term structure of interest rates is
The term structure of interest rates is
- the relationship among interest rates of different bonds with the same maturity.
- the structure of how interest rates move over time.
- the relationship among the terms to maturity of different bonds.
- the relationship among interest rates on bonds with different maturities (correct)
According to the liquidity premium theory
According to the liquidity premium theory
- a steeply rising yield curve indicates that short-term interest rates are expected to rise in the future
- a moderately rising yield curve indicates that short-term interest rates are not expected to change much in the future
- a flat yield curve indicates that short-term interest rates are expected to fall moderately in the future
- all of the above are true (correct)
It cannot explain the empirical fact that interest rates on bonds of different maturities
tend to move together
It cannot explain the empirical fact that interest rates on bonds of different maturities tend to move together
- segmented markets theory (correct)
- expectations theory
- liquidity premium theory
- both (a) and (b) of the above
The default risk premium
The default risk premium
If the preferred habitat theory is correct, a reduction by the Treasury in the supply
of 30-year bonds should
If the preferred habitat theory is correct, a reduction by the Treasury in the supply of 30-year bonds should
Under the preferred habitat theory, a flat yield curve indicates that investors
expect future short-term rates to
Under the preferred habitat theory, a flat yield curve indicates that investors expect future short-term rates to
What is the most important contrast between the segmented markets theory and
the expectations theory?
What is the most important contrast between the segmented markets theory and the expectations theory?
According to the liquidity premium theory
According to the liquidity premium theory
In actual practice, short-term interest rates are just as likely to fall as to rise; this is the
major shortcoming of the
In actual practice, short-term interest rates are just as likely to fall as to rise; this is the major shortcoming of the
Yield curves can be
Yield curves can be
Study Notes
Theories of Interest Rate Structure
- The liquidity premium theory fails to explain the empirical fact that interest rates on bonds of different maturities tend to move together.
Preferred Habitat Theory
- A reduction in the supply of 30-year bonds by the Treasury should lead to an increase in their price and a decrease in their yield, according to the preferred habitat theory.
- A flat yield curve indicates that investors expect future short-term rates to be low.
Segmented Markets Theory vs. Expectations Theory
- The most important contrast between the segmented markets theory and the expectations theory is their approach to explaining the term structure of interest rates.
Liquidity Premium Theory
- The major shortcoming of the liquidity premium theory is that it assumes short-term interest rates are more likely to rise than fall, which is not the case in actual practice.
Yield Curves
- Yield curves can be influenced by various factors, including the supply and demand of bonds with different maturities.
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Description
This quiz will test your knowledge on the term structure of interest rates, including concepts such as yield curves, short-term vs long-term interest rates, and their impact on the economy.
