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