Question

1)Ceteris paribus, what do you think would be the most likely impact on the price of short-term securities and their interest rates if the Treasury were to issue $100 billion of short-term debt securities. Select one:

a. I don't know

b. Prices and interest rates would both decline

c. Prices and interest rates would both rise

d. Prices would rise and interest rates would decline

e. Prices would decline and interest rates would rise.

2) If we see that the treasury bond yield curve is normal (i.e. upward sloping), we can conclude that: Select one:

a. Inflation is expected to decline in the future.

b. Not sure.

c. Maturity risk premiums could help to explain the yield curve's upward slope.

d. The economy is not in a recession.

e. Long-term bonds are a better buy than short-term bonds.

3) Assume an inverted yield curve. In such situation, how does the interest rate on a 10-year loan to some firm ABC compare to that on a 1-year loan to the same firm (ABC)? Select one:

a. The yield on a 10-year loan would have to be higher than that on a 1‑year loan because of the maturity risk premium.

b. The interest rate on a 10-year loan would be less than that on a 1-year loan.

c. The yields on the two loans would be equal.

d. I don't know.

e. It is impossible to tell without knowing the relative risks of the two loans.

Answer 1

1)
e. Prices would decline and interest rates would rise.

2)
c. Maturity risk premiums could help to explain the yield curve's upward slope.

3)
b. The interest rate on a 10-year loan would be less than that on a 1-year loan.