Question Details

The yield on the long bond is higher than on short-term bonds 



1. "Bond prices soared and yields plunged after the Labor Department said the producer price index rose by 0.4 percent in March. Although Wall Street had been expecting a rise of only 0.3 percent, the core index, excluding the volatile food and energy sector, rose a slight 0.1 percent against expectations of a 0.3 percent rise." Bond prices soared because 74 
a) inflation expectations increased b) inflation expectations decreased 
c) yields plunged due to supply of bonds exceeding demand for bonds 
d) of uncertainties due to irregularities in reporting the monthly price index 
2. "Although the Fed has been successful in pushing down short-term interest rates to 4 percent, the long bond yield has fallen very little and is still up at 7.5 percent." The yield on the long bond is higher than on short-term bonds because 
a) the demand for long-term bonds must be greater than for short-term bonds 
b) the Fed must be selling many more long-term bonds than short-term bonds 
c) long-run inflation expectations must be higher than short-run inflation expectations 
d) long-run inflation expectations must be lower than short-run inflation expectations 
3. "I think the bond market's got room on the upside. With real rates so high and inflation looking like its not coming back, there's room for further rally." Which of the following is an explanation for this? 
a) bondholders love high real interest rates 
b) the Fed should soon reduce the rate of money growth 
c) interest rates should fall because inflation expectations should fall 
d) bond prices should rise because the nominal interest rate should rise 
4. "The recent surge in the money supply must be contained, and in very short order, if the hope for a viable long-term bond market is to be sustained." The problem here is that this surge can cause 
a) higher long-term interest rates which will lower long-term bond prices 
b) higher long-term interest rates which will raise long-term bond prices 
c) lower long-term interest rates which will lower long-term bond prices 
d) lower long-term interest rates which will raise long-term bond prices 
5. "The 'core' measures of producer and consumer price inflation, which exclude the volatile food and energy components, were above Wall Street's estimates. The figures sparked heavy _____ in the bond market, where the 30-year bond yield ______ one-quarter of a percentage point in just two days." The blanks are best filled with 
a) buying; rose b) buying; fell c) selling; rose d) selling; fell



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