Question

5. 5) If the three-month Treasury bill yields 3.1%, a ten-year Treasury note yields 4.7%, and a BBB-rated ten-year corporate bond yields 6.5%, what is the term spread? _______

   A) 1.60% B) 4.70% C) 1.80% D) 3.40%

6. 6) The expectations theory indicates an upward-sloping yield curve occurs because investors expect rates to: _______.

   A) rise
   B) fall
   C) eitherriseorremainconstant D) noconclusioncanbedrawn

7. 7) Banks deal with problems of adverse selection by: _______.

   A) gathering financial information about the borrower B) making only short-term loans
   C) only lending to existing customers
   D) charging higher interest rates

8. 8) If you deposit $1,000 in a savings account at an annual rate of 8%, how much will you have in the account at the end of three years? Assume compounding of annual interest and no withdrawals. _______

   A) $1,166 B) $1,240 C) $1,260 D) $1,320

9. 9) Which of the following will lead to a higher interest rate on a loan? _______

   A) Lower opportunity cost B) Greater excess reserves C) Lower expected inflation D) Higher risk of default

10. 10) In the financial markets, a bond issuer is: _______.

    A) theborrower
    B) thelender
    C) thelenderortheborrowerdependingontheuseofthefunds D) dependentontheratingagency’sreport

Answer 1

5]

Term spread is the difference between the yields of bonds with different maturities.

Term spread is measured for bonds of a similar risk-class. Term spread is not calculated for a risk-free bond versus a corporate bond.

In this case, term spread is calculated between the 3-month Treasury Bill and 10-year Treasury Note.

Term spread = 4.7% - 3.1%

Term spread = 1.60%