8006 Exam Dumps | Which of the following statements are true: I. An yield curve plots zero coupon spot rates for different

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Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition
PRMIA.8006.v2021-04-25.q101
Question 67

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Question 67/101

Which of the following statements are true:
I. An yield curve plots zero coupon spot rates for different maturities for bonds with different credit ratings II. An yield curve represents the term structure of interest rates for similar instruments across a range of maturities III. The liquidity preference theory explains why the yield curve can be downward sloping IV. The term structure refers to the relationship between bond yields and bond maturities

A. I and II

B. I, II, III and IV

C. II and IV

D. III and IV

Correct Answer: C

Explanation
An yield curve would be meaningless if it combines, for example, the yield on a AAA bond with the yield on a bond near default on the same curve. Therefore statement I is incorrect as any typical yield curve generally refers to similar instruments, and similarity includes similarity of issuer type and credit risk profiles.
Statement II accurately describes an yield curve, and statement IV explains what the term structure is.
Statement III is incorrect as the liquidity preference theory offers an explanation for an upward sloping yield curve and not a downward sloping one.

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