Finance 2 & 6 - On the basis of this information, which of...

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4.  The real risk-free rate, r*, is 4%, and it is expected to remain constant over time. Inflation is expected to be 2% per year for the next three years, after which time inflation is expected to remain at a constant rate of 5% per year. The maturity risk premium is equal to 0.1(t - 1)%, where t = the bond's maturity. What is the yield on a 10-year Treasury bond? A)  8.9% B)  9.0% C)  9.9% D)  9.1% E)  8.1% Points Earned:  5.0/5.0  Correct Answer(s): B 5.  A bond trader observes the following information: The Treasury yield curve is downward sloping . Empirical data indicates that a positive maturity risk premium applies to both Treasury and corporate  bonds. Empirical data also indicates that there is no liquidity premium for Treasury securities but that a positive  liquidity premium is built into corporate bond yields.
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Unformatted text preview: On the basis of this information, which of the following statements is most correct? A) A 10-year corporate bond must have a higher yield than a 5-year Treasury bond. B) The corporate yield curve must be flat. C) Since the Treasury yield curve is downward sloping, the corporate yield curve must also be downward sloping. D) A 10-year Treasury bond must have a higher yield than a 10-year corporate bond. E) A 5-year corporate bond must have a higher yield than a 10-year Treasury bond. Points Earned: 0.0/5.0 Correct Answer(s): E 6. Which of the following is an example of a capital market instrument? A) Commercial paper. B) Preferred stock. C) U.S. Treasury bills. D) Money market mutual funds. E) Banker's acceptances. Points Earned: 5.0/5.0 Correct Answer(s): B...
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This note was uploaded on 11/05/2009 for the course BUS FIN 2100 taught by Professor Shmidl during the Spring '09 term at Laramie County Community College.

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Finance 2 & 6 - On the basis of this information, which of...

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