#1
According to the Fisher effect, what happens to nominal interest rates when inflation rates increase?
Nominal interest rates increase
ExplanationNominal rates rise with increasing inflation rates.
#2
What is the formula for calculating the present value of a bond's future cash flows?
PV = C / (1 + r)^n
ExplanationPresent value = Cash flow / (1 + interest rate)^period
#3
Which of the following factors affects bond prices inversely?
Interest rates
ExplanationBond prices inversely affected by interest rates.
#4
What does a flat yield curve typically indicate about the market's interest rate expectations?
Stable interest rate expectations
ExplanationFlat curve indicates stable interest rate expectations.
#5
What does the term 'bond duration' measure?
The sensitivity of a bond's price to changes in interest rates
ExplanationMeasurement of bond price sensitivity to interest rate changes.
#6
Which of the following interest rate theories suggests that long-term interest rates are determined by the average of short-term interest rates expected over the term of a bond?
Expectations theory
ExplanationLong-term rates determined by average expected short-term rates.
#7
What is the primary factor affecting bond prices according to the liquidity preference theory?
Expected changes in interest rates
ExplanationBond prices affected by expected interest rate changes.
#8
Which theory suggests that long-term interest rates are determined by the interaction of supply and demand for bonds in each maturity segment of the bond market?
Market segmentation theory
ExplanationLong-term rates determined by supply-demand interaction in bond market segments.
#9
What is the term used to describe the risk that a bond issuer may default on its obligations?
Credit risk
ExplanationRisk of bond issuer defaulting on obligations.
#10
Which type of bond pays a fixed interest rate and has a maturity date that the issuer is legally obligated to repay?
Straight bond
ExplanationBond with fixed rate and obligated maturity.
#11
Which of the following bond valuation methods discounts all future cash flows at the bond's yield to maturity?
Discounted cash flow (DCF) analysis
ExplanationValuation by discounting cash flows at bond's yield to maturity.
#12
Which of the following is NOT a limitation of the expectations theory?
It assumes perfect market segmentation
ExplanationNot limited by perfect market segmentation assumption.
#13
What does a negative convexity indicate for a bond's price sensitivity to interest rate changes?
The bond's price changes in the opposite direction to interest rate changes
ExplanationBond price changes opposite to interest rate with negative convexity.
#14
Which of the following factors does NOT affect bond duration?
Market demand
ExplanationBond duration not affected by market demand.