Question

1. Which of the following is NOT a risk associated with bonds?

a.Default risk.

b.Maturity risk.

c.Liquidity risk.

d.Face value risk.

e.All of these are bond risks.

2. Which of the following would not be considered a liquid asset?

a.A Rembrandt painting

b.Cash

c.Treasury Bonds

d.Stocks Traded on the NYSE

e.All of these assets are liquid

3.Which of the following is NOT a shape you could see in a graph of the term structure?

a.Upward sloping

b.Downward sloping

c."M" shaped

d."Humped" shaped

e.All of these are valid shapes of the term structure

4.Why does the Liquidity Preference Model fail to explain any Term Structure other than upward sloping?

a.Because liquidity does not change with maturity of bonds.

b.Because liquidity diminishes with increasing maturity of bonds.

c.Because liquidity increases with increasing maturity of bonds.

d.The Liquidity Preference Model explains any Term Structure perfectly.

e.None of these is true.

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

Q1:

Option E ; All of these are risks for a bond

Q2:

Option A; A painting cant be sold easily whereas other assets can, hence illiquid asset is painting

Q3:

Option C; There is no M shaped cureve in Term structure graphs

Q4:

Option B; As per the model liquidity diminishes with increasing maturity of the model. Hence only one pattern can be explained

Q5:

Option A; Since pension funds are for long term, they prefer long term bonds to match the duration

Q6:

Option D

Q7:

Option A; Here the interest rate for longer bonds will be less than than of shorter bonds