Finance 2 & 6

# Finance 2 & 6 - 7.0 Assume that the pure expectations...

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11.  Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.25%, and a maturity premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity. What rate of return would you expect on a 5-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. A)  6.05% B)  6.35% C)  6.25% D)  6.15% E)  5.95% Points Earned:  5.0/5.0  Correct Answer(s): C 12.  SCENARIO 6-1 Looking in today's newspaper, you observe the following yield curve information:   Maturity Yield       1 year 5.0%   2 years 5.5      3 years 6.0      4 years ???      5 years

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Unformatted text preview: 7.0 Assume that the pure expectations hypothesis holds and that the market expects that the one-year rate will be 7.2% four years from today. What is the four-year rate today? A) 6.50% B) 5.20% C) 6.80% D) 6.20% E) 6.95% Points Earned: 0.0/5.0 Correct Answer(s): E 13. Currently, 3-year Treasury securities yield 5.4%, 7-year Treasury securities yield 5.8%, and 10-year Treasury securities yield 6.2%. If the expectations theory is correct, what does the market expect will be the yield on 3-year Treasury securities seven years from today? A) 6.54% B) 5.80% C) 7.14% D) 5.68% E) 4.58% Points Earned: 0.0/5.0 Correct Answer(s): C...
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Finance 2 & 6 - 7.0 Assume that the pure expectations...

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