loping yield curve suggests that the market thinks interest rates in the loping yield curve suggests that the market thinks interest rates in the ve suggests that the market thinks interest rates in the future will be th
loping yield curve suggests that the market thinks interest rates in the loping yield curve suggests that the market thinks interest rates in the ve suggests that the market thinks interest rates in the future will be th
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Which of the following is consistent with the pure expectations theory of the yield curve? Check all that apply.
A downward-sloping yield curve suggests that the market thinks interest rates in the future will be higher than they are today.
✓ A downward-sloping yield curve suggests that the market thinks interest rates in the future will be lower than they are today.
A flat yield curve suggests that the market thinks interest rates in the future will be the same as they are today.
A flat yield curve suggests that the market thinks interest rates in the future will be higher than they are today.
Maria would like to invest a certain amount of money for two years and considers investing in a one-year bond that pays 6 percent and a two-year
bond that pays 9 percent. Maria is considering the following investment strategies:
Strategy A: In the first year, buy a one-year bond that pays 6 percent. Once that bond matures, buy another one-year bond that pays
the forward rate.
Strategy B: In the first year, buy a two-year bond that pays 9 percent annually.
If the one-year bond purchased in year two pays 5 percent, Maria will choose Strategy B
Which of the following describes conditions under which Maria would be indifferent between Strategy A and Strategy B?
O The rate on the one-year bond purchased in year two pays 10.272 percent.
The rate on the one-year bond purchased in year two pays 11.360 percent.
The rate on the one-year bond purchased in year two pays 12.085 percent.
The rate on the one-year bond purchased in year two pays 13.052 percent.
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