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3.1 Theories on term structure of interest rates

Quiz by Alia

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48 questions
Show answers
  • Q1
    What does the Expectations Theory of the yield curve primarily reflect?
    Investor preferences for specific maturities.
    Supply and demand dynamics in bond markets.
    Investors' expectations about future short-term interest rates.
    Risk premiums on long-term bonds.
    30s
  • Q2
    According to the Segmented Market Theory, how are interest rates determined?
    By supply and demand within each specific maturity segment.
    Only by the risk premium required by investors.
    By expectations of future interest rates.
    By global economic conditions.
    30s
  • Q3
    What is a primary implication of the Liquidity Premium Theory regarding long-term bonds?
    They are only influenced by market expectations.
    They are avoidable due to low demand.
    They generally yield higher than short-term bonds due to a liquidity premium.
    They have the same yield as short-term bonds.
    30s
  • Q4
    Which yield curve shape is likely when investors expect future short-term interest rates to rise?
    Horizontal.
    Flat.
    Inverted.
    Upward sloping.
    30s
  • Q5
    What does the Segmented Market Theory say about the relationship between different maturities?
    They always move together.
    They reflect the same risk premiums.
    There is no direct relationship; they can move independently.
    They are perfect substitutes.
    30s
  • Q6
    According to the Expectations Theory, which scenario results in a flat yield curve?
    Investors expect rates to decline.
    Investors expect a large risk premium.
    Investors have high demand for long-term bonds.
    Investors expect future short-term rates to remain unchanged.
    30s
  • Q7
    What is the key factor that Liquidity Premium Theory introduces to the yield curve?
    The risk premium for holding long-term bonds.
    The independence of different maturities.
    The averaging of short-term rates.
    The focus on current interest rates only.
    30s
  • Q8
    What can lead to an inverted yield curve according to Expectations Theory?
    High demand for short-term bonds.
    Investors expect future short-term interest rates to decline.
    Low liquidity in the market.
    Flat investor expectations.
    30s
  • Q9
    In the context of the yield curve, what does a flat curve indicate?
    Expectations of stable future interest rates.
    A preference for long maturities.
    High risk for long-term bonds.
    Increasing demand for short-term bonds.
    30s
  • Q10
    Which of the following does NOT form part of the primary theories explaining the term structure of interest rates?
    Segmented Market Theory.
    Expectations Theory.
    Market Equilibrium Theory.
    Liquidity Premium Theory.
    30s
  • Q11
    What does Expectations Theory primarily suggest about long-term interest rates?
    They are determined by inflation rates.
    They reflect only current market conditions.
    They are always lower than short-term rates.
    They are an average of current and expected future short-term rates.
    30s
  • Q12
    According to Segmented Market Theory, what determines the interest rates for different maturities?
    Global economic trends only.
    Supply and demand within each specific maturity segment.
    Central bank policies exclusively.
    Historical performance of the market.
    30s
  • Q13
    What is a key implication of the Liquidity Premium Theory?
    All bonds yield the same interest ultimately.
    Short-term bonds always have higher yields.
    Long-term bonds generally yield higher rates than short-term bonds.
    Liquidity does not affect bond yields.
    30s
  • Q14
    What shape does the yield curve indicate if investors expect future short-term rates to rise?
    Inverted.
    Upward Sloping.
    Vertical.
    Flat.
    30s
  • Q15
    Which theory suggests that different maturities can affect interest rates independently?
    Market Efficiency Theory.
    Expectations Theory.
    Liquidity Premium Theory.
    Segmented Market Theory.
    30s

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