Quiz3

The Term Structure of Interest Rates

Multiple Choice Questions

1. The term structure of interest rates is: 

A. The relationship between the rates of interest on all securities.

B. The relationship between the interest rate on a security and its time to maturity.

C. The relationship between the yield on a bond and its default rate.

D. All of the above.

E. None of the above.

The term structure of interest rates is the relationship between two variables, years and yield to maturity (holding all else constant).

Difficulty: Easy

2. Treasury STRIPS are 

A. securities issued by the Treasury with very long maturities

B. extremely risky securities

C. created by selling each coupon or principal payment from a whole Treasury bond as a separate cash flow.

D. created by pooling mortgage payments made to the Treasury.

E. C and D

Treasury STRIPS are created by selling each coupon or principal payment from a whole Treasury bond as a separate cash flow.

Difficulty: Easy

3. The value of a Treasury bond should 

A. be equal to the sum of the value of STRIPS created from it.

B. be less than to the sum of the value of STRIPS created from it.

C. be greater than the sum of the value of STRIPS created from it.

D. A or B

E. B or C

The value of a Treasury bond should be equal to the sum of the value of STRIPS created from it.

Difficulty: Easy

4. If the value of a Treasury bond was higher than the value of the sum of its part (STRIPPED cash flows) you could 

A. profit by buying the stripped cash flows and reconstituting the bond.

B. not profit by buying the stripped cash flows and reconstituting the bond.

C. profit by buying the bond and creating STRIPS.

D. B and C

E. none of the above

Only buying STRIPS and reconstituting the bond would be profitable.

Difficulty: Moderate

5. If the value of a Treasury bond was lower than the value of the sum of its part (STRIPPED cash flows) you could ...