FIM Literature Quiz

The yield curve in the following figure indicates that interest rates are expected to...

• Fall sharply in the near-term and rise later on

• Rise in the near term and fall later on

• Fall moderately in the near-term and rise later on

• Remain unchanged in the near term and fall later on

When yield curves are downward sloping...

• Long-term interest rates are above short-term interest rates

• Medium-term interest rates are above both short-term and long-term interest rates

• Short-term interest rates are above long-term interest rates

• Short-term interest rates are about the same as long-term interest rates

A ________ yield curve predicts a future increase in inflation.

• downward sloping

• flat

• slightly U-shaped

• (steeply) upward sloping

In three-factor hedging, investors aim to...

• Minimize the factor loading for each factor

• Maximize the factor loading for each factor

• Minimize the factor movement of each factor

• Maximize the factor movement of each factor

In a situation with a normal yield curve, an increase in the yield spread between a short-term (ST) zero-coupon bond and a long-term (LT) zero -coupon bond (both par at $100) is expected to lead to...

• A relatively cheaper ST bond compared to the LT bond

• An equal price effect on the ST bond and the LT bond

• A relatively more expensive ST bond compared to the LT bond

• The yield spread has no effect on the pricing of the bonds

What if the YTM of a bond trading at par is 2.5%, but the bond has a 3% coupon payment?

• The bond is trading at a discount

• The bond is trading at a premium

• The coupon payment has no influence on the bond’s trading value

• This situation will not occur in real life

What is the coupon rate of a bond trading at par, maturing in 1 year, with a spot rate of 5.58%?

• Not possible to compute in the given timeframe

• 5.57%

• 5.58%

• 5.59%

If the current yield is higher at the time of sale than the yield at time of purchase, then...

• The strip bond price at the time of sale is pushed downward from the original path to maturity

• The strip bond price at the time of sale is pushed upward from the original path to maturity

• The strip bond price at the time of sale moves as flat line to the original path to maturity

• The strip bond price at the time of sale goes up first, but starts to go down later from the original path to maturity

• The strip bond price at the time of sale goes down first, but starts to go up later from the original path to maturity

If an investor originally purchased a strip when discount rates were 5.5% and sold when rates had dropped to 2.5%, he/she will realize the yield of…

• Lower than 2.5%

• 2.5%

• Between 2.5% and 5.5%

• 5.5%

• Higher than 5.5%