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Multiple Choice Questions 1. The term structure of interest rates is: A. The relationship

Question : Multiple Choice Questions 1. The term structure of interest rates is: A. The relationship

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 these are correct.
E. None of these is correct.

 

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. created both by selling each coupon or principal payment from a whole Treasury bond as a separate cash flow and by pooling mortgage payments made to the Treasury

 

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 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. be greater than or less than the sum of the value of STRIPS created from it
E. None of these is correct.

 

 

 

4. If the value of a Treasury bond was higher than the value of the sum of its parts (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.  not profit by buying the stripped cash flows and reconstituting the bond but profit by buying the bond and creating STRIPS
E.  None of these is correct.
 

 

 


Multiple Choice Questions
 

5. If the value of a Treasury bond was lower than the value of the sum of its parts (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. not profit by buying the stripped cash flows and reconstituting the bond and profit by buying the bond and creating STRIPS
E. None of these is correct.

 

6. If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows) 
A. arbitrage would probably occur.
B. arbitrage would probably not occur.
C. the FED would adjust interest rates.
D. arbitrage would probably not occur and the FED would adjust interest rates
E. None of these is correct.

 

7. If the value of a Treasury bond was higher than the value of the sum of its parts (STRIPPED cash flows) 
A. arbitrage would probably occur.
B. arbitrage would probably not occur.
C. the FED would adjust interest rates.
D. arbitrage would probably not occur and the FED would adjust interest rates
E. None of these is correct.

 

8. Bond stripping and bond reconstitution offer opportunities for ______, which can occur if the _________ is violated. 
A. arbitrage; Law of One Price
B. arbitrage; restrictive covenants
C. huge losses; Law of One Price
D. huge losses; restrictive covenants
E. both arbitrage; restrictive covenants and huge losses; restrictive covenants

 

9. ______ can occur if _____. 
A. arbitrage; the Law of One Price is not violated
B. arbitrage; the Law of One Price is violated
C. riskless economic profit; the Law of One Price is not violated
D. riskless economic profit; the Law of One Price is violated
E. both arbitrage; the Law of One Price is violated and riskless economic profit; the Law of One Price is violated

 

10. The yield curve shows at any point in time: 
A. The relationship between the yield on a bond and the duration of the bond.
B. The relationship between the coupon rate on a bond and time to maturity of the bond.
C. The relationship between yield on a bond and the time to maturity on the bond.
D. All of these are correct.
E. None of these is correct.

 

 

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