Question 1: Which of the following statements is CORRECT?
a. Yield curves must be either upward or downward slopingthey cannot first rise and then decline.
b. If the pure expectations theory is correct, a downward sloping yield curve indicates that interest rates are expected to decline in the future.
c. Downward sloping yield curves are inconsistent with the expectations theory.
d. The shape of the yield curve depends only on expectations about future inflation.
e. If the yield curve is upward sloping, the inflation rate must be expected to increase.
Question 2: A 10-year, $1,000 face value bond sells for $925 and has an 8% annual coupon rate.
A. Assume that the YTM remains constant for the next three years. What will be the price of the bond three years from today?
a. $ 977
b. $ 956
c. $ 925
d. $ 941
e. $1,000
B. What is the bond's yield to maturity?
a. 9.33%
b. 9.00%
c. 9.55%
d. 8.75%
e. 9.18%
C. What is the bond's current yield?
a. 8.00%
b. 8.95%
c. 7.88%
d. 8.33%
e. 8.65%