Question

11) Which of the following typically has the lowest yield? A) 5-year AAA corporate bond B) 2-year U.S. Treasury note C) Fed Funds D) 3-month U.S. Treasury bill 12) Debt instruments are also called: A) adjustable notes B) credit instruments C) perpetual securities D) interest rate swaps 13) Which of the following characteristic is NOT fixed on a coupon bond? A) Current yield B) Coupon rate C) Maturity D) Par amount 14) If you purchased a U.S. Treasury at a price of $105:08 with a par amount of $5,000, how much did you pay? A) $5,000 B) $5,250 C) $4,762 D) $5,262 15) The expected real interest rate approximately equals: A) the nominal interest rate plus the expected rate of inflation B) the nominal interest rate minus the ordinary tax rate C) the nominal interest rate minus the expected rate of inflation D) the yield to maturity on a coupon bond 16) If a government's outlays exceed its revenues, the government is running a: A) deficit and is a net saver of funds B) surplus and is a net borrower of funds C) deficit and is a net borrower of funds D) surplus and is a net saver of funds 17) The risk structure of interest rates refers to the A) difference in interest rates on bonds with the same maturity B) difference in interest rates on similar bonds with different maturities C) additional yield to compensate savers for the liquidity of the bond D) additional yield to compensate savers for purchasing bonds above par

Answer 1

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Answer to Question 11

In the context of the question asked, yield here refers to the interest rate and not YTM (Yield to maturity)

The answer for question 11 is Option D : 3 month US treasury bill

The explanation for the same is as follows : The interest rate is determined by various factors of which 2 factors are the risk taken by the investor and maturity period. The risk factor for a stable government security will always be less than corporate security as the default risk is low. That is, it is assumed that a govt. will have lesser or zero probability to default in its interest and principal payments. Thus, we are left between Option B and Option D.

Now if everything is kept same (here since both the securities belong to US treasury), the bond with short maturity period will have a lower rate of interest and a bond with longer maturity period will have higher rate of interest, since the securities are subject to higher volatility over a longer period of time. Thus the answer is Option D.