9.

An upward sloping yield curve

a.

may incorporate a liquidity premium.

b.

All of these are correct.

c.

may reflect the confounding of the liquidity premium with interest rate expectations.

d.

may be an indication that interest rates are expected to increase.

10.

Based on the concept of bond duration, which one of the following statements is correct?

a.

Higher yields (YTMs) lead to longer durations.

b.

Longer durations mean greater volatility.

c.

Longer maturities mean shorter durations.

d.

Lower coupons result in shorter durations.

11.

Given the yield on a 3 year zero-coupon bond is 7% and forward rates of 6% in year 1 and 6.5% in year 2, what must be the forward rate in year 3?

a.

8.6%

b.

8.5%

c.

6.9%

d.

7.2%

12.

Liquidity preference theory suggests that when bond investors move from short-term securities to long term securities

a.

they are expecting short-term rates to fall.

b.

they want to be protected from the risk of falling bond prices in the future.

c.

they believe that they can earn a higher rate of return over the long term by buying bonds with longer maturities than they could by buying a series of short-term investments.

d.

they are expecting long-term rates to rise.