Test bank - chapter 6

# Test bank - chapter 6 - Chapter 6 Interest rate 1 Suppose...

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Chapter 6: Interest rate 1, Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.25%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. a. 5.25% b. 5.50% c. 5.75% d. 6.00% e. 6.25% 4, 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 1-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. 5.75% b. 5.85% c. 5.95% d. 6.05% e. 6.15% 11, Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.25%, a maturity premium of 0.08% per year to maturity applies, i.e., MRP = 0.08%(t), where t is the years to maturity. Suppose also that a liquidity premium of 0.5% and a default risk premium of 0.85 applies to A-rated corporate b onds. How much higher would the rate of return be on a 10-year A-rated corporate bond than on a 5- year Treasury bond. Here we assume that the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. a. 1.75% b. 1.80% c. 1.85% d. 1.90% e. 1.95% 13, Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2-year T-bill is 6.0%. Assuming the pure expectations theory is correct, what is the market's forecast for

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Test bank - chapter 6 - Chapter 6 Interest rate 1 Suppose...

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