1. An inverted yield curve is a(n) ______________ yield curve.

a. Flat, or zero slope

b. Upward sloping

c. Downward sloping

d. Downward, then upward-sloping

e. None of the above

2. Empirical evidence of the term structure of interest rates shows that,

a. The yield on long-term bonds is usually lower than the yield on short-term bonds

b. The yield on long-term bonds is usually higher than the yield on short-term bonds

c. Government bonds have a lower rate of return than corporate bonds because the

latter are riskier

d. On average interest rates on corporate investment certificates (CIC) are higher than

the interest rate offered on US Treasury debt

3. The expectations hypothesis states that,

a. 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

b. 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

c. Future interest rates can be forecasted by looking at past returns on similar

instruments

d. Future interest rates can be forecasted by looking at the behavior of the stock market

e. None of the above

4. 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 bond today is 8% and the expected yield on a one-year bond one year from now is 8.5%, and the expected yield on a one-year bond two years from now is 9%.

a. 8%

b. 8.2%

c. 8.5%

d. 9%

e. None of the above

5. Plots of the yield curve can be useful for:

a. Predicting the future course of inflation

b. Predicting the future trends in international trade

c. Predicting the future course of interest rates

d. Prediction the future policy actions of the Federal Reserve System

6. An upward sloping yield curve means that,

a. Short-term interest rates are expected to fall, so that long-term interest rates will be

higher than short-term interest

b. Short-term interest rates are expected to rise, so that short-term interest rates will be

higher than long-term interest

c. Short-term interest rates are expected to rise, so that long-term interest rates will be

higher than short-term interest

d. Short-term interest rates are expected to fall, so that short-term interest rates will be

lower than long-term interest

7. Which of the following is NOT a stylized fact about the yield curve.

a. The yield curve is generally upward sloping

b. The yield curve is generally downward sloping

c. The yield curve tends to shift over time

d. The yield curve tends tend to predict future economic activity

8. If the Expectations Hypothesis holds true about long-term and short-term bonds being substitutes, then if the U.S. government decides to issue a large stock of long-term bonds, we could expect,

a. The yield curve to become steeper

b. The yield curve to become flatter

c. The yield curve to shift down

d. The yield curve to shift up

9. Suppose that businesses believe that the economy is about to expand, then we could expect,

a. The yield curve to become steeper

b. The yield curve to become flatter

c. The yield curve to shift down

d. The yield curve to shift up

10. Empirical evidence in US shows that when the spread between long term bonds and short-term bonds is negative (that is: the yield curve slopes downward or is inverted) then __________ is highly possible.

a. Higher inflation

b. Lower inflation

c. A recession

d. An economic expansion

11. According to the pure expectations theory of term structure, a flat yield curve is interpreted to mean that,

a. Interest rates are expected to rise

b. Interest rates are expected to fall

c. Interest rates are expected to remain constant

d. Interest rates are expected to rise and then to fall

e. None of the above

12. Yield curves can be classified as:

a. Upward sloping

b. Downward sloping

c. Flat

d. All of the above

e. Only (a) and (b)

13. Yield curves can be:

a. Steeply upward sloping

b. Moderately upward sloping

c. Downward sloping

d. All of the above

e. Only (a) and (b)

14. Typically, yield curves are:

a. Gently upward sloping

b. Gently downward sloping

c. Flat

d. Bowl shaped

e. Mound shaped

15. When yield curves are steeply upward sloping,

a. Long-term interest rates are above short-term interest rates

b. Short-term interest rates are above long-term interest rates

c. Short-term interest rates are about the same as long-term interest rates

d. Medium-term interest rates are above both short-term and long-term interest rates

e. Medium-term interest rates are below both short-term and long-term interest rates

16. An inverted yield curve:

a. Slopes up

b. Is flat

c. Slopes down

d. Has a U shape

e. Has an inverted U shape

17. According to the expectations theory of the term structure,

a. The interest rate on long-term bonds will equal an average of short-term interest rates

that people expect to occur over the life of the long-term bonds

b. Buyers of bonds do not prefer bonds of one maturity over another

c. Interest rates on bonds of different maturities move together over time

d. All of the above

e. Only (a) and (b)

18. According to the expectations theory of the term structure,

a. The interest rate on long-term bonds will equal an average of short-term interest rates

that people expect to occur over the life of the long-term bonds

b. Interest rates on bonds of different maturities move together over time

c. Buyers of bonds prefer short-term to long-term bonds

d. All of the above

e. Only (a) and (b)

19. According to the expectations theory of the term structure,

a. When the yield curve is steeply upward sloping, short-term interest rates are expected

to rise in the future

b. When the yield curve is downward sloping, short-term interest rates are expected to

decline in the future

c. Buyers of bonds do not prefer bonds of one maturity over another

d. All of the above

e. Only (a) and (b)

20. According to the expectations theory of the term structure,

a. When the yield curve is steeply upward sloping, short-term interest rates are expected

to rise in the future

b. When the yield curve is downward sloping, short-term interest rates are expected to

decline in the future

c. Investors have strong preferences for short-term relative to long-term bonds,

explaining why yield curves typically slope upward

d. All of the above

e. Only (a) and (b)

21. According to the expectations theory of the term structure,

a. When the yield curve is steeply upward sloping, short-term interest rates are expected

to rise in the future

b. When the yield curve is downward sloping, short-term interest rates are expected to

decline in the future

c. Yield curves should be as equally likely to slope downward as slope upward

d. All of the above

e. Only (a) and (b)

22. According to the expectations theory of the term structure,

a. The interest rate on long-term bonds will equal an average of short-term interest rates

that people expect to occur over the life of the long-term bonds

b. Buyers of bonds do not prefer bonds of one maturity over another

c. Yield curves should be as equally likely to slope downward as slope upward

d. All of the above

e. Only (a) and (b)

23. According to the expectations theory of the term structure,

a. The interest rate on long-term bonds will equal an average of short-term interest rates

that people expect to occur over the life of the long-term bonds

b. Buyers of bonds do prefer short-term to long-term bonds

c. Interest rates on bonds of different maturities do not move together over time

d. All of the above

24. Assume that over the next two years, the expected path of 1-year interest rates is 4 percent and 1 percent. The expectations theory of the term structure predicts that the current interest rate on 2-year bond is: a. 1% b. 1.5% c. 2% d. 2.5% e. 4%

25. Assume that over the next two years, the expected path of 1-year interest rates is 1 percent and 4 percent. The expectations theory of the term structure predicts that the current interest rate on 2-year bond is: a. 1% b. 1.5% c. 2% d. 2.5% e. 4%

26. Assume that the current 1-year interest rate is 3 percent and the current 2-year interest rate is 2 percent. The expectations theory of the term structure predicts that the interest rate expected on 1-year bonds next year is: a. 1% b. 1.5% c. 2% d. 2.5% e. 4%