If investors expect stable rates of inflation in the future, the pure expectations theor

A bond market analyst states, “The current term structure of interest rates is upward sloping which implies the market believes short-term interest rates will rise in the future.” Which theory of the term structure of interest rates does the analystmost likely believe?

A. Pure expectations theory.

B. Liquidity preference theory.

C. Market segmentation theory.

Which of the following is least likely a tool used by the U.S. Federal Reserve Bank to directly influence the level of interest rates?

A. Verbal persuasion.

B. Open market operations.

C. Setting the rate on 30-year bonds.

Consider two ten-year bonds, one that contains no embedded options and the other that gives its owner the right to convert the bond to a fixed number of shares of the issuer’s common stock. The convertibility option in the second bond cannot be exercised for five years. The bonds are otherwise identical. Compared with the yield on the convertible bond, the yield on the bond with the embedded option is most likely:

A. lower.

B. the same.

C. higher.

The spread between the yields on a Ginnie Mae passthrough security and a comparable Treasury security is best explained by:

A. prepayment risk.

B. reinvestment risk.

C. credit risk.