Interest Rates - Solutions (Fall 2009)

1. * 2. * 3. * 4. * 5. * 6. * 7. * Interest Rates - Solutions An abnormal or inverted yield curve is the same as a downward sloping yield curve. A. True B. False Dell Corporation would be involved in a spot market transaction if it were to agree today to sell 500 computers, seven months from now at a price of $500 each, to Best Buy. A. B. True False In general we may say that interest rates should fall during an economic boom and rise during an economic recession. A. B. True False If the pure expectations theory of the term structure is correct, then an upward sloping yield curve implies a positive maturity risk premium (MRP). A. B. True False If the yield curve is upward sloping, the yield on a 2-year corporate bond must be less than the yield on a 5-year Treasury bond. A. B. True False If the yield curve is downward sloping, the yield on a 10-year Treasury bond must be less than the yield on an 8-year corporate bond. A. B. True False Under the Liquidity Premium theory of the term structure, and assuming a positive maturity risk premium, we should never observe a flat or downward sloping yield curve. A. B. True False Old Exam Questions - Interest Rates - Solutions Page 1 of 49 Pages 8. * 9. * 1. * In general, it is said that an upward sloping yield curve indicates that investors expect interest rates to increase in the future. However, this may not necessarily be true if we consider the existence of a maturity premium. A. B. True False