Expectations hypothesis of term structure of interest rates

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Reference no: EM131911123

1. You purchased a 5-year annual interest coupon bond one year ago. Its coupon interest rate was 6% and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond immediately after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately_____.

A) 5.0%

B) 5.5%

C) 7.6%

D) 9.0%

2. We observe that the slope of yield curve is negative (downward sloping). According to the pure expectations hypothesis of the term structure of interest rates, this is an indication that __________.

A) short term interest rate is expected to rise in the future

B) long term interest rate is expected to rise in the future

C) short term interest rate is expected to fall in the future

D) long term interest rate is expected to fall in the future

Reference no: EM131911123

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