Review Problems – Exam 2 – BMGT 340
Chapter 6
1.
Which of the following is true?
a.
Suppose financial institutions, such as savings and loans, were required by
law to make long term, fixed interest rate mortgages, but at the same time,
they were largely restricted, in terms of their capital sources, to taking
deposits that could be withdrawn on demand.
Under these conditions,
these financial institutions should prefer a “normal” yield curve to an
inverted curve.
b.
You are considering establishing a new firm, the University Assistance
Company.
The UAC would obtain funds in the short term money market
and write long term mortgage loans to students so that they might buy
condominiums rather than rent.
A downward sloping yield curve, if it
persisted over time, would be best for UAC.
c.
The yield curve is upward sloping, or normal, if short term rates are higher
than long term rates.
2.
Assume interest rates on 30 year government and corporate bonds were as
follows: Tbond = 7.72%, AAA = 8.72%, A = 9.64%, BBB = 10.18%.
The
differences in rates among these issues are caused primarily by
a.
Tax effects
b.
Default risk differences
c.
Maturity risk differences
d.
Inflation differences
3.
The real risk free rate of interest is 2%.
Inflation is expected to be 3% the next 2
years and 5% during the next 3 years after that.
Assume that the maturity risk
premium is 0.
What is the yield on 3 year Treasury securities?
a.
5.2%
b.
5.7%
c.
6%
d.
6.2%
e.
6.5%
4.
Using the information from the previous problem, what is the yield on 5 year
Treasury securities?
a.
5.2%
b.
5.7%
c.
6%
d.
6.2%
e.
6.5%
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View Full Document5.
A Treasury bond that matures in 20 years has a yield of 8%.
A 20 year corporate
bond has a yield of 11%.
Assume that the liquidity premium on the corporate
bond is 1%.
What is the default risk premium on the corporate bond?
a.
.5%
b.
1%
c.
1.5%
d.
1.75%
e.
2%
6.
You have the following data for a given bond.
Real risk free rate, k*, = 3%,
inflation premium = 8%, default risk premium = 2%, liquidity premium = 2%,
and maturity risk premium = 1%.
What is the yield of a 3 month Treasury bill?
a.
10%
b.
11%
c.
12%
d.
13%
e.
14%
7.
Referring to the information in the previous question, what is the interest rate on
longterm Treasury securities, or Tbonds?
a.
10%
b.
11%
c.
12%
d.
13%
e.
14%
8.
Assume that a 3year Treasury note has no maturity risk or liquidity risk and that
the real risk free rate falls to 2%.
A three year T note carries a yield to maturity of
12%.
If the expected inflation rate is 12% for the coming year and 10% the year
after, what is the implied expected inflation for the third year?
a.
8%
b.
9%
c.
10%
d.
11%
e.
12%
9.
Assume that the risk free rate is 2%, that the expected inflation rate during year 2
is 3%, and that 2 year T bonds yield 5.5%.
If the maturity
risk premium is zero,
what is the inflation rate in year 1?
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 Spring '08
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 Finance, Interest Rates, Interest, Interest Rate

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