Question 1: Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to

• be unaffected.
• become upward sloping.
• become inverted.
• become flat.

Question 2: The yield offered on a debt security is ____ related to the prevailing risk-free rate and ____ related to the security's risk premium.

• negatively; positively
• negatively; negatively
• positively; negatively
• positively; positively

Question 3:  Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate according to the pure expectations theory?

• 11.41 percent
• 12.62 percent
• 3.00 percent
• 15.08 percent
• 12.00 percent

Question 4: Assume that a yield curve is influenced by interest rate expectations and a liquidity premium. Assume the yield curve is initially flat. If liquidity suddenly was no longer important, the yield curve would now have a ____ (assuming no other changes).

• slight downward slope
• steep downward slope
• slight upward slope
• steep upward slope

Question 5: Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, then the one-year forward rate is

• 3.0 percent.
• 7.0 percent.
• 8.0 percent.
• 7.6 percent.

Question 6: If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting ____ in interest rates.

• a large increase
• a slight increase
• a slight decrease
• no changes

Question 7: Assume that the Treasury bond yield today is 2% higher than it was one year ago. Also assume that the credit (default) risk premium of an A-rated bond declined by 0.4% since one year ago. A newly issued A-rated bond will likely offer a yield today that is ____ the yield that was offered on an A-rated bond issued one year ago.

• greater than
• equal to
• less than
• A or B are both common

Question 8: Securities that offer ____ liquidity will offer a ____ yield to be preferred.

• lower; higher
• B and C
• lower; lower
• higher; higher

Question 9: If all other characteristics are similar, ____ would have to offer ____.

• taxable securities; a higher after-tax yield than tax-exempt securities
• tax-exempt securities; a higher before-tax yield than taxable securities
• tax-exempt securities; a higher after-tax yield than taxable securities
• taxable securities; a higher before-tax yield than tax-exempt securities

Question 10: An investor's tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax yield of 11 percent?

• 7.7 percent
• none of the above
• 15.71 percent
• 130 percent
• 11.00 percent