Question

5.Which type of investor might have a particular preference for long term bonds, independent of market interest rates?

a.Pension funds

b.Money market funds.

c.Corporations raising large amounts of capital.

d.All of these investors would prefer long term bonds.

e.None of these investors would prefer long term bonds.

6. What is the basic idea behind any calculation based on the Expectation Hypothesis model?

a.Investment strategies that span different amounts of time are expected to earn different amounts over the investment horizon.

b.Investment strategies that span the same amount of time are expected to earn different amounts over the investment horizon.

c.Investment strategies that span different amounts of time are expected to earn the same amount over the investment horizon.

d.Any investment strategy that spans the same amount of time, is expected to earn the same amount over the investment horizon.

e.None of these are correct.

7.If the market expects interest rates to fall in the future, what shape would you expect to see in a graph of the Term Structure?

a.Downward sloping

b.Upward sloping

c.Humped

d.Flat

e.None of these are correct

Answer 1

(5)

Pension funds are the investors that might have particular preference for long term bonds independent of market rates.

Money market funds and large corporates raising have effect if market rate changes.

Hence option a is the correct answer.

(6)

Expectation hypothesis model states that long term yield can be calculated as average of short term rates over the Years .

Hence option a is the correct answer which has investment strategies that span the different amounts of time are expected to earn different amounts over investment horizon.

(7)

If the market expects the interest rates to fall in future then the term.structure would represent a downward sloping yield curve or shape.

Hence option a is the correct answer.