1 Which of the following is NOT an assumption behind the Pure Expectations Theory? Investors will switch between short- and long-term investments in order to achieve the highest return. (a) (b) Investors have a preference for long-term securities. (c) There are no transaction costs (d) There are no taxes. 2 Which of the following is a plausible reason why an upward sloping yield curve is considered "normal", in that it is most commonly observed? (a) Investors have a preference for short-term securities, resulting in an upward bias compared to the (b) Investors are generally optimistic, and predict increasing interest rates in the future more often than (c) You earn more interest from investing for a long period of time than by investing for a short period of (d) Investors have a preference for long-term securities, resulting in an upward bias compared to the 3 Which of the following theories predicts that the yield for each maturity will be a function of Pure Expectations yield curve. they predict decreasing interest rates time, so it is natural that the long-term yield will always be greater than the short-term yield Pure Expectations yield curve. demand and supply for maturities of that maturity? (a) The Pure Expectations theory (b) The Liquidity Premium theory (c) The Market Segmentation theory (d) All theories make this prediction 4 If the current one-year yield is 2.9% and the current two-year yield is 3.3%, what is the implied year rate one year from now? o (a) 3.30% (b) 3.96% (c) 3.70% (d) 3.33%