1. Which theory of term structure assumes investors have absolutely no preference for one maturity over another?

a. segmented markets theory

b. pure expectations theory

c. preferred habitat theory

d. liquidity premium theory

2. Which theory predicts the efforts of the Treasury and the Federal Reserve to twist or rotate the yield curve will be ineffective?

a. segmented markets theory

b. pure expectations theory

c. both of the above

d. none of the above

3. If you have a strong feeling the economy is on the brink of a strong economic downturn, your best strategy as an investor would be to

a. sell your short-term bonds and buy long-term bonds

b. sell your long-term bonds and buy short-term bonds

c. sell all your bonds and put the money in stocks

d. sell all your bonds and put your money in gold and silver

4. If today's 1-year bond rate is 5%, and you expect 1-year bond yields to jump to 7% next year, then fall to 3% the year after that, which yield is predicted by the liquidity premium theory for today's three-year bonds?

a. 6%

b. 5%

c. 7%

d. cannot determine answer with information provided

5. The pure expectations theory of term structure

a. indicates long-term interest rates are the average of successive expected short-term interest rates

b. asserts long-term and short-term assets are very close substitutes

c. implies expected holding period returns are the same on all maturities

d. says all of the above

ANSWER KEY - 1b; 2b; 3a; 4d; 5d