Chapter 15 Test Bank

Chapter 15 Test Bank - Static Key
1. Structure of interest rates is
A. the relationship between the rates of interest on all securities.

B. the relationship between the interest rate on a security and its time to maturity.
C. the relationship between the yield on a bond and its default rate.
D. All of the options are correct.
E. None of the options are correct.
The term structure of interest rates is the relationship between two variables, years and yield to maturity (holding all else constant).
AACSB: Reflective Thinking

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Topic: Term structure of interest rates
2. Treasury STRIPS are
A. securities issued by the Treasury with very long maturities.

B. extremely risky securities.
C. created by selling each coupon or principal payment from a whole Treasury bond as a separate cash flow.
D. created by pooling mortgage payments made to the Treasury.
Treasury STRIPS are created by selling each coupon or principal payment from a whole Treasury bond as a separate cash flow.

Blooms: Remember
Difficulty: 1 Basic
Topic: U.S. Treasury and agency securities
3. The value of a Treasury bond should
A. be equal to the sum of the value of STRIPS created from it.

B. be less than the sum of the value of STRIPS created from it.
C. be greater than the sum of the value of STRIPS created from it.
The value of a Treasury bond should be equal to the sum of the value of STRIPS created from it.

Blooms: Remember
Difficulty: 1 Basic
4. If the value of a Treasury bond was higher than the value of the sum of its parts (STRIPPED cash flows), you could
A. profit by buying the stripped cash flows and reconstituting the bond.
B. not profit by buying the stripped cash flows and reconstituting the bond.
C. profit by buying the bond and creating STRIPS.
D. not profit by buying the stripped cash flows and reconstituting the bond and profit by buying the bond and creating STRIPS.
Only buying STRIPS and reconstituting the bond would be profitable.

Blooms: Understand
15-1
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Intermediate
Topic: Arbitrage and its limits
5. If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows), you could
A. profit by buying the stripped cash flows and reconstituting the bond.
B. not profit by buying the stripped cash flows and reconstituting the bond.
C. profit by buying the bond and creating STRIPS.
D. not profit by buying the stripped cash flows and reconstituting the bond and profit by buying the bond and creating STRIPS.
Buying and stripping the bond would be profitable so answer D is correct.

Blooms: Understand
6. If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows),
A. arbitrage would probably occur.

B. arbitrage would probably not occur.
C. the FED would adjust interest rates.
D. None of the options are correct.
If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows) arbitrage would probably
occur.

Blooms: Understand
7. If the value of a Treasury bond was higher than the value of the sum of its parts (STRIPPED cash flows),
A. arbitrage would probably occur.

B. arbitrage would probably not occur.
C. the FED would adjust interest rates.
D. None of the options are correct.
If the value of a Treasury bond was higher than the value of the sum of its parts (STRIPPED cash flows) arbitrage would probably
occur.

Blooms: Understand
8. Bond stripping and bond reconstitution offer opportunities for ______, which can occur if the _________ is violated.
A. arbitrage; law of one price

B. arbitrage; restrictive covenants
C. huge losses; law of one price
D. huge losses; restrictive covenants
Bond stripping and bond reconstitution offer opportunities for arbitrage, which can occur if the law of one price is violated.

Blooms: Understand
15-2
9. ______ can occur if _____.
A. Arbitrage; the law of one price is not violated

B. Arbitrage; the law of one price is violated
C. Low-risk economic profit; the law of one price is not violated
D. Low-risk economic profit; the law of one price is violated
E. Arbitrage and low-risk economic profit; the law of one price is violated
Arbitrage (also known as riskless economic profit) can occur if the law of one price is violated.

Blooms: Understand
10. The yield curve shows at any point in time
A. the relationship between the yield on a bond and the duration of the bond.
B. the relationship between the coupon rate on a bond and time to maturity of the bond.
C. the relationship between yield on a bond and the time to maturity on the bond.
The yield curve shows the relationship between yield on a bond and the time to maturity on the bond.

Blooms: Remember
Difficulty: 1 Basic
Topic: Yield curve
11. An inverted yield curve implies that
A. long-term interest rates are lower than short-term interest rates.

B. long-term interest rates are higher than short-term interest rates.
C. long-term interest rates are the same as short-term interest rates.
D. intermediate-term interest rates are higher than either short- or long-term interest rates.
The inverted, or downward sloping, yield curve is one in which short-term rates are higher than long-term rates. The inverted yield
curve has been observed frequently, although not as frequently as the upward sloping, or normal, yield curve.

Blooms: Remember
Difficulty: 1 Basic
Topic: Yield curve
12. An upward sloping yield curve is a(n) _______ yield curve.
A. normal
B. humped
C. inverted
D. flat
The upward sloping yield curve is referred to as the normal yield curve, probably because, historically, the upward sloping yield
curve is the shape that has been observed most frequently.
15-3
Blooms: Remember
Difficulty: 1 Basic
Topic: Yield curve
13. According to the expectations hypothesis, an upward-sloping yield curve implies that
A. interest rates are expected to remain stable in the future.

B. interest rates are expected to decline in the future.
C. interest rates are expected to increase in the future.
D. interest rates are expected to decline first, then increase.
E. interest rates are expected to increase first, then decrease.
An upward sloping yield curve is based on the expectation that short-term interest rates will increase.

Blooms: Remember
Difficulty: 1 Basic
Topic: Interest rate theories
14. Which of the following are possible explanations for the term structure of interest rates?
A. The expectations theory

B. The liquidity preference theory
C. Modern portfolio theory
D. The expectations theory and the liquidity preference theory
The expectations theory and the liquidity preference theory are theories that have been proposed to explain the term structure.

Blooms: Remember
Difficulty: 1 Basic
15. The expectations theory of the term structure of interest rates states that
A. forward rates are determined by investors'expectations of future interest rates.

B. forward rates exceed the expected future interest rates.
C. yields on long- and short-maturity bonds are determined by the supply and demand for the securities.
The forward rate equals the market consensus expectation of future short interest rates.

Blooms: Remember
Difficulty: 1 Basic
16. Suppose that all investors expect that interest rates for the 4 years will be as follows:
15-4
What is the price of a 3-year zero-coupon bond with a par value of $1,000?
A. $863.83
B. $816.58
C. $772.18
D. $765.55
$1,000/(1.05)(1.07)(1.09) = $816.58.
AACSB: Knowledge Application

Blooms: Apply
Topic: Forward rates
If you have just purchased a 4-year zero-coupon bond, what would be the expected rate of return on your investment in the first year if the
implied forward rates stay the same? (Par value of the bond = $1,000)
A. 5%
B. 7%
C. 9%
D. 10%
The forward interest rate given for the first year of the investment is given as 5% (see table above).

Blooms: Apply
What is the price of a 2-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000)
A. $1,092
B. $1,054
C. $1,000
D. $1,073
1/2
[(1.05)(1.07)] 1 = 6%; FV = 1000, n = 2, PMT = 100, i = 6, PV = $1,073.34.
15-5
Blooms: Apply
What is the yield to maturity of a 3-year zero-coupon bond?
A. 7.03%
B. 9.00%
C. 6.99%
D. 7.49%
1/3
[(1.05)(1.07)(1.09)] 1 = 6.99.

Blooms: Apply
20. The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000.
According to the expectations theory, what is the expected forward rate in the third year?
A. 7.00%
B. 7.33%
C. 9.00%
D. 11.19%
881.68/808.88 1 = 9%.

Blooms: Apply
15-6
What is the yield to maturity on a 3-year zero-coupon bond?
A. 6.37%
B. 9.00%
C. 7.33%
D. 10.00%
1/3
(1,000/808.81) 1 = 7.33%.

Blooms: Apply
Topic: Bond yields and returns
What is the price of a 4-year maturity bond with a 12% coupon rate paid annually? (Par value = $1,000.)
A. $742.09
B. $1,222.09
C. $1,000.00
D. $1,141.92
1/4
(1,000/742.09) 1 = 7.74%; FV = 1,000, PMT = 120, n = 4, i = 7.74, PV = $1,141.92.

Blooms: Apply
Difficulty: 3 Challenge
23. An upward-sloping yield curve
A. may be an indication that interest rates are expected to increase.

B. may incorporate a liquidity premium.
C. may reflect the confounding of the liquidity premium with interest rate expectations.
One of the problems of the most commonly used explanation of term structure, the expectations hypothesis, is that it is difficult to
15-7
separate out the liquidity premium from interest rate expectations.

Blooms: Remember
Difficulty: 1 Basic
Topic: Yield curve
24. The "break-even" interest rate for year n that equates the return on an n-period zero-coupon bond to that of an n 1 period zero-
coupon bond rolled over into a one-year bond in year n is defined as
A. the forward rate.

B. the short rate.
C. the yield to maturity.
D. the discount rate.
The forward rate for year n, fn, is the "break-even" interest rate for year n that equates the return on an n-period zero-coupon bond
to that of an n 1 period zero-coupon bond rolled over into a one-year bond in year n.

Blooms: Remember
Difficulty: 1 Basic
25. When computing yield to maturity, the implicit reinvestment assumption is that the interest payments are reinvested at the
A. coupon rate.
B. current yield.
C. yield to maturity at the time of the investment.
D. prevailing yield to maturity at the time interest payments are received.
E. the average yield to maturity throughout the investment period.
In order to earn the yield to maturity quoted at the time of the investment, coupons must be reinvested at that rate.

Blooms: Remember
26. Given the bond described above, if interest were paid semi-annually (rather than annually), and the bond continued to be priced
at $850, the resulting effective annual yield to maturity would be
A. less than 12%.

B. more than 12%.
C. 12%.
D. Cannot be determined.
FV = 1000, PV = 850, PMT = 50, n = 40, i = 5.9964 (semi-annual); (1.059964) 2 1 = 12.35%.

Blooms: Apply
15-8
27. Forward rates ____________ future short rates because ____________.
A. are equal to; they are both extracted from yields to maturity
B. are equal to; they are perfect forecasts
C. differ from; they are imperfect forecasts
D. differ from; forward rates are estimated from dealer quotes while future short rates are extracted from yields to maturity
E. are equal to; although they are estimated from different sources, they both are used by traders to make purchase decisions
Forward rates are the estimates of future short rates extracted from yields to maturity but they are not perfect forecasts because the
future cannot be predicted with certainty; therefore they will usually differ.

Blooms: Understand
Difficulty: 1 Basic
28. The pure yield curve can be estimated
A. by using zero-coupon Treasuries.

B. by using stripped Treasuries if each coupon is treated as a separate "zero."
C. by using corporate bonds with different risk ratings.
D. by estimating liquidity premiums for different maturities.
E. by using zero-coupon Treasuries and by using stripped Treasuries if each coupon is treated as a separate "zero."
The pure yield curve is calculated using stripped or zero-coupon Treasuries.

Blooms: Remember
Topic: Yield curve
29. The on the run yield curve is
A. a plot of yield as a function of maturity for zero-coupon bonds.

B. a plot of yield as a function of maturity for recently-issued coupon bonds trading at or near par.
C. a plot of yield as a function of maturity for corporate bonds with different risk ratings.
D. a plot of liquidity premiums for different maturities.
The on the run yield curve is a plot of yield as a function of maturity for recently issued coupon bonds trading at or near par.

Blooms: Remember
Topic: Yield curve
30. The yield curve
A. is a graphical depiction of term structure of interest rates.

B. is usually depicted for U.S. Treasuries in order to hold risk constant across maturities and yields.
C. is usually depicted for corporate bonds of different ratings.
D.is a graphical depiction of term structure of interest rates and is usually depicted for U.S. Treasuries in order to hold risk constant
across maturities and yields.
E. is a graphical depiction of term structure of interest rates and is usually depicted for corporate bonds of different ratings.
The yield curve (yields vs. maturities, all else equal) is depicted for U.S. Treasuries more frequently than for corporate bonds, as the
risk is constant across maturities for Treasuries.

15-9
Blooms: Remember
Difficulty: 1 Basic
Topic: Yield curve
15-10
31.
What should the purchase price of a 2-year zero-coupon bond be if it is purchased at the beginning of year 2 and has face value of
$1,000?
A. $877.54
B. $888.33
C. $883.32
D. $893.36
E. $871.80
$1,000/[(1.064)(1.071)] = $877.54.

Blooms: Apply
32.
What would the yield to maturity be on a four-year zero-coupon bond purchased today?
A. 5.80%
B. 7.30%
C. 6.65%
D. 7.25%
1/4
[(1.058) (1.064) (1.071) (1.073)] 1 = 6.65%.

Blooms: Apply
15-11
33.
Calculate the price at the beginning of year 1 of a 10% annual coupon bond with face value $1,000 and 5 years to maturity.
A. $1,105
B. $1,132
C. $1,179
D. $1,150
E. $1,119
1/5
i = [(1.058) (1.064) (1.071) (1.073) (1.074)] 1 = 6.8%; FV = 1000, PMT = 100, n = 5, i = 6.8, PV = $1,131.91.

Blooms: Apply
34. Given the yield on a 3-year zero-coupon bond is 7.2% and forward rates of 6.1% in year 1 and 6.9% in year 2, what must be the
forward rate in year 3?
A. 8.4%
B. 8.6%
C. 8.1%
D. 8.9%
3
f3 = (1.072) /[(1.061) (1.069)] 1 = 8.6%.

Blooms: Apply
35. An inverted yield curve is one
A. with a hump in the middle.

B. constructed by using convertible bonds.
C. that is relatively flat.
D. that plots the inverse relationship between bond prices and bond yields.
E. that slopes downward.
An inverted yield curve occurs when short-term rates are higher than long-term rates.

Blooms: Remember
Difficulty: 1 Basic
Topic: Yield curve
15-12
36. Investors can use publicly available financial data to determine which of the following?
I) The shape of the yield curve

II) Expected future short-term rates (if liquidity premiums are ignored)
III) The direction the Dow indexes are heading
IV) The actions to be taken by the Federal Reserve
A. I and II
B. I and III
C. I, II, and III
D. I, III, and IV
E. I, II, III, and IV
Only the shape of the yield curve and future inferred rates can be determined. The movement of the Dow Indexes and Federal
Reserve policy are influenced by term structure but are determined by many other variables also.

Blooms: Understand
Topic: Yield curve
37. Which of the following combinations will result in a sharply-increasing yield curve?
A. Increasing future expected short rates and increasing liquidity premiums

B. Decreasing future expected short rates and increasing liquidity premiums
C. Increasing future expected short rates and decreasing liquidity premiums
D. Increasing future expected short rates and constant liquidity premiums
E. Constant future expected short rates and increasing liquidity premiums
Both of the forces will act to increase the slope of the yield curve.

Blooms: Understand
Topic: Yield curve
38. The yield curve is a component of
A. the Dow Jones Industrial Average.

B. the consumer price index.
C. the index of leading economic indicators.
D. the producer price index.
E. the inflation index.
Since the yield curve is often used to forecast the business cycle, it is used as one of the leading economic indicators.

Blooms: Remember
Difficulty: 1 Basic
Topic: Yield curve
39. The most recently issued Treasury securities are called
A. on the run.
B. off the run.
C. on the market.
D. off the market.
15-13
The most recently issued Treasury securities are called on the run.

Blooms: Remember
Difficulty: 1 Basic
40.
Suppose that all investors expect that interest rates for the 4 years will be as follows:
What is the price of 3-year zero-coupon bond with a par value of $1,000?
A. $889.08
B. $816.58
C. $772.18
D. $765.55
$1,000/(1.03)(1.04)(1.05) = $889.08.

Blooms: Apply
41. If you have just purchased a 4-year zero-coupon bond, what would be the expected rate of return on your investment in the first
year if the implied forward rates stay the same? (Par value of the bond = $1,000.) Suppose that all investors expect that interest rates
for the 4 years will be as follows:
A. 5%
B. 3%
C. 9%
D. 10%
The forward interest rate given for the first year of the investment is given as 3% (see table above).

Blooms: Apply
15-14
42. What is the price of a 2-year maturity bond with a 5% coupon rate paid annually? (Par value = $1,000.) Suppose that all
investors expect that interest rates for the 4 years will be as follows:
A. $1,092.97
B. $1,054.24
C. $1,028.51
D. $1,073.34
1/2
[(1.03)(1.04)] 1 = 3.5%; FV = 1,000, n = 2, PMT = 50, i = 3.5, PV = $1,028.51.

Blooms: Apply
43. What is the yield to maturity of a 3-year zero-coupon bond?
Suppose that all investors expect that interest rates for the 4 years will be as follows:
A. 7.00%
B. 9.00%
C. 6.99%
D. 4.00%
1/3
[(1.03)(1.04)(1.05)] 1 = 4%.

Blooms: Apply
44. According to the expectations theory, what is the expected forward rate in the third year?
The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000.
15-15
A. 7.23%
B. 9.37%
C. 9.00%
D. 10.9%
862.57/788.66 1 = 9.37%.

Blooms: Apply
45. What is the yield to maturity on a 3-year zero-coupon bond?
The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000.
A. 6.37%
B. 9.00%
C. 7.33%
D. 8.24%
1/3
(1,000/788.66) 1 = 8.24%.

Blooms: Apply
What is the price of a 4-year maturity bond with a 10% coupon rate paid annually? (Par values = $1,000.)
A. $742.09
15-16
B. $1,222.09
C. $1,035.66
D. $1,141.84
1/4
(1,000/711.00) 1 = 8.9%; FV = 1000, PMT = 100, n = 4, i = 8.9, PV = $1,035.66.

Blooms: Apply
You have purchased a 4-year maturity bond with a 9% coupon rate paid annually. The bond has a par value of $1,000. What would
the price of the bond be one year from now if the implied forward rates stay the same?
A. $995.63
B. $1,108.88
C. $1,000.00
D. $1,042.78
1/3
(925.16/711.00) 1.0 = 9.17%; FV = 1000, PMT = 90, n = 3, i = 9.17, PV = $995.63.

Blooms: Apply
48. Given the bond described above, if interest were paid semi-annually (rather than annually) and the bond continued to be priced
at $917.99, the resulting effective annual yield to maturity would be
A. less than 10%.

B. more than 10%.
C. 10%.
D. Cannot be determined.
2
FV = 1,000, PV = 917.99, PMT = 45, n = 36, i = 4.995325 (semi-annual); (1.04995325) 1 = 10.24%.

Blooms: Apply
15-17
49. What should the purchase price of a 2-year zero-coupon bond be if it is purchased at the beginning of year 2 and has face value
of $1,000?
A. $877.54
B. $888.33
C. $883.32
D. $894.21
E. $871.80
$1,000/[(1.055)(1.06)] = $894.21.

Blooms: Apply
50. What would the yield to maturity be on a four-year zero-coupon bond purchased today?
A. 5.75%
B. 6.30%
C. 5.65%
D. 5.25%
1/4
[(1.05) (1.055) (1.06) (1.065)] 1 = 5.75%.

Blooms: Apply
51. Calculate the price at the beginning of year 1 of an 8% annual coupon bond with face value $1,000 and 5 years to maturity.
15-18
A. $1,105.47
B. $1,131.91
C. $1,084.25
D. $1,150.01
E. $719.75
1/5
i = [(1.05) (1.055) (1.06) (1.065) (1.07)] 1 = 6%; FV = 1000, PMT = 80, n = 5, i = 6, PV = $1084.25.

Blooms: Apply
52. Given the yield on a 3-year zero-coupon bond is 7% and forward rates of 6% in year 1 and 6.5% in year 2, what must be the
forward rate in year 3?
A. 7.2%
B. 8.6%
C. 8.5%
D. 6.9%
3
f3 = (1.07) /[(1.06) (1.065)] 1 = 8.5%.

Blooms: Apply
53. What should the purchase price of a 1-year zero-coupon bond be if it is purchased today and has face value of $1,000?
A. $966.37
B. $912.87
C. $950.21
D. $956.02
E. $945.51
$1,000/(1.046) = $956.02.
15-19
Blooms: Apply
A. $966.87
B. $911.37
C. $950.21
D. $956.02
E. $945.51
$1,000/[(1.046)(1.049)] = $911.37.

Blooms: Apply
A. $887.42
B. $871.12
C. $879.54
D. $856.02
E. $866.32
$1,000/[(1.046)(1.049)(1.052)] = $866.32.

Blooms: Apply
15-20
A. $887.42
B. $821.15
C. $879.54
D. $856.02
E. $866.32
$1,000/[(1.046)(1.049)(1.052)(1.055)] = $821.15.

Blooms: Apply
15-21
57. What should the purchase price of a 5-year zero-coupon bond be if it is purchased today and has face
value of $1,000?
A. $776.14
B. $721.15
C. $779.54
D. $756.02
E. $766.32
$1,000/[(1.046)(1.049)(1.052)(1.055)(1.058)] = $776.14.

Blooms: Apply
58. What is the yield to maturity of a 1-year bond?
A. 4.6%
B. 4.9%
C. 5.2%
D. 5.5%
E. 5.8%
4.6% (given in table).

Blooms: Apply
15-22
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
A. 4.6%
B. 4.9%
C. 5.2%
D. 5.5%
E. 5.8%
1/5
[(1.046)(1.049)(1.052)(1.055)(1.058)] 1 = 5.2%.

Blooms: Apply
A. 4.69%
B. 4.95%
C. 5.02%
D. 5.05%
E. 5.08%
1/4
[(1.046)(1.049)(1.052)(1.055)] 1 = 5.05%.

Blooms: Apply
15-23
A. 4.6%
B. 4.9%
C. 5.2%
D. 5.5%
E. 5.8%
1/3
[(1.046)(1.049)(1.052)] 1 = 4.9%.

Blooms: Apply
A. 4.6%
B. 4.9%
C. 5.2%
D. 4.7%
E. 5.8%
1/2
[(1.046)(1.049)] 1 = 4.7%.

Blooms: Apply
15-24

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What is the term structure of interest rates?

What is the term structure of interest rates?

What are Treasury STRIPS and how are they created?

What are Treasury STRIPS and how are they created?

Chapter 15 Test Bank - Static Key

1. Structure of interest rates is

A. the relationship between the rates of interest on all securities.

AACSB: Reflective Thinking

2. Treasury STRIPS are

A. securities issued by the Treasury with very long maturities.

AACSB: Reflective Thinking

3. The value of a Treasury bond should

A. be equal to the sum of the value of STRIPS created from it.

AACSB: Reflective Thinking

Only buying STRIPS and reconstituting the bond would be profitable.

AACSB: Reflective Thinking

Buying and stripping the bond would be profitable so answer D is correct.

AACSB: Reflective Thinking

A. arbitrage would probably occur.

AACSB: Reflective Thinking

A. arbitrage would probably occur.

AACSB: Reflective Thinking

A. arbitrage; law of one price

AACSB: Reflective Thinking

9. ______ can occur if _____.

A. Arbitrage; the law of one price is not violated

AACSB: Reflective Thinking

10. The yield curve shows at any point in time

AACSB: Reflective Thinking

11. An inverted yield curve implies that

A. long-term interest rates are lower than short-term interest rates.

AACSB: Reflective Thinking

12. An upward sloping yield curve is a(n) _______ yield curve.

AACSB: Reflective Thinking

A. interest rates are expected to remain stable in the future.

AACSB: Reflective Thinking

A. The expectations theory

AACSB: Reflective Thinking

A. forward rates are determined by investors'expectations of future interest rates.

AACSB: Reflective Thinking

AACSB: Knowledge Application

AACSB: Knowledge Application

What is the yield to maturity of a 3-year zero-coupon bond?

AACSB: Knowledge Application

AACSB: Knowledge Application

What is the yield to maturity on a 3-year zero-coupon bond?

AACSB: Knowledge Application

AACSB: Knowledge Application

23. An upward-sloping yield curve

A. may be an indication that interest rates are expected to increase.

AACSB: Reflective Thinking

A. the forward rate.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

A. less than 12%.

FV = 1000, PV = 850, PMT = 50, n = 40, i = 5.9964 (semi-annual); (1.059964) 2 1 = 12.35%.

AACSB: Knowledge Application

27. Forward rates ____________ future short rates because ____________.

AACSB: Reflective Thinking

28. The pure yield curve can be estimated

9. __ can occur if _.

27. Forward rates future short rates because .