Question 1 (1 point)

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If the current one-year interest rate is 2.7% and the expected one-year rate next year is 2.1%, then, according to the liquidity premium theory, the interest rate on a 2-year bond will be:

Question 1 options:

	2.4% minus liquidity premium
	2.1% minus liquidity premium
	2.1% plus liquidity premium
	2.4% plus liquidity premium

Question 2 (1 point)

If we observe that the yield on both the 1-year and the 2-year Treasuries are 2% and there is a positive liquidity premium, then, according to the liquidity premium theory market participants expect that the 1-year interest rate next year will be:

Question 2 options:

	2%
	higher than 2%
	lower then 2%
	we can't tell

Question 3 (1 point)

If the yield curve is steeply upward sloping, the reason could be any of the following, except:

Question 3 options:

	bond investors expect lower inflation in the future.
	bond investors expect that the Fed will increase interest rates soon.
	bond investors expect that the economy will expand strongly.
	bond investors expect higher inflation in the future.

Question 4 (1 point)

If the interest rate on a 2-year bond is higher than the interest rate on a 10-year bond, then:

Question 4 options:

	the yield curve is sloping up
	this is not enough information to decide the slope of the yield curve
	the yield curve is flat
	the yield curve is sloping down

Question 5 (1 point)

If the yield on a 2-year bond falls from 2% to 1.5%, while the yield on a 10-year bond goes from 3% to 2.25%, then we know that the new yield curve: (after interest rate changes)

Question 5 options:

	is flat
	is sloping down wards
	is sloping upwards
	we can't tell since yields were changing

Question 6 (1 point)

An inverted (downward sloping) yield curve could be seen as a negative sign for all the following reasons, EXCEPT:

Question 6 options:

	Expected lower interest rates in the future could mean that people expect the Fed to lower rates due to a recession in the future.
	Interest rates turn negative when the yield curve is inverted.
	We often get a recession after a period with an inverted yield curve.
	Expected lower interest rates could reflect expectations of a lower inflation rate due to a weaker economy.

Question 7 (1 point)

If people expect lower inflation in the future due to the Fed fighting inflation, then, they may expect a ____ interest rate in the future, and the yield curve will slope _____

Question 7 options:

	lower, up
	lower, down or be flat
	higher, up
	higher, down or be flat

Question 8 (1 point)

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If 1-year interest rates for the next three years are expected to be 1, 1, and 1 percent, and the 3-year liquidity premium (or term premium) is 1 percent, then the 3-year bond rate will be

Question 8 options:

A)	1 percent.

B)	2 percent.

C)	3 percent.

D)	4 percent.

Question 9 (1 point)

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According to the liquidity premium theory of the term structure, a downward sloping yield curve indicates that short-term interest rates are expected to

Question 9 options:

A)	remain unchanged in the future.

B)	rise in the future.

C)	decline sharply in the future.

D)	decline moderately in the future.