Question 1

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According to the expectations theory, if the current one-year interest rate is 4%, and the one-year interest rate the following year is expected to be 5%, then, the interest rate on a bond with 2 years to maturity should be:

Question options:

	4%
	4.5%
	5%

Bond investors want a liquidity premium as compensation for holding longer term bonds, because:

Question 2

0 / 1 point

Question options:

	longer-term bonds are so boring, because you can't sell them before maturity.
	prices of longer-term bonds react more strongly to changes in interest rates.
	longer-term bonds have a less volatile return.

Question 5

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If the current 1-year interest rate is 3% and the current interest rate on a 2-year bond is 4%, what is the expected 1-year rate starting a year from today?

Question options:

	3%
	5%
	7%

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Question 7

0 / 1 point

Assume the current 1-year interest rate is 4%, and you expect the 1-year rate to be 5% next year and 7% in the following year. If the graph below is the yield curve given your expectations (we ignore the liquidity premium in this question), then, in the graph:

Question options:

	a = 4%, b = 9%, c = 16%.
	a = 4%, b = 4.5%, c = 5.33%.
	we know that a = 4%, but we don't know what the other numbers will be.

Question 9

0 / 1 point

An inverted yield curve is seen as a possibly negative sign for all the following reasons, EXCEPT:

Question options:

	Expected lower interest rates in the future could mean that people expect the Fed to lower rates due to a recession in the future.
	Interest rates turn negative when the yield curve is inverted.
	We often get a recession after a period with an inverted yield curve.