practice test 2.2

practice test 2.2 - Practice Test 11 1. The real risk-free...

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Unformatted text preview: Practice Test 11 1. The real risk-free rate of interest, r*, is expected to remain constant at 3 percent. Inflation is expected to be 3 percent for next year and then 2 percent a year thereafter. The maturity risk premium is zero. Given this information, which of the following statements is most correct? a. The yield curve for US. Treasury securities is downward sloping. b. A 5—year corporate bond has a higher yield than a 5—year Treasury security. c. A 5—year corporate bond has a higher yield than a 7-year Treasury security. d. Statements a and b are correct. c. All of the statements above are correct. 2. Assume interest rates on long—term government and corporate bonds were as follows: T—bond = 7.72% AAA '= 8.72%, A : 9.64%, BBB : 10.18% The differences in rates among these issues were caused primarily by a. Tax effects. b. Default risk differences. c. Maturity risk differences. d. Inflation differences. e. Statements b and d are correct. 3. The real risk-free rate of interest is 3 percent. Inflation is expected to be 4 percent this coming year, jump to 5 percent next year, and increase to 6 percent the year after (Year 3). According to the expectations theory, what should be the interest rate on 3-year, risk—free ecurities today? / 21.18% We; 3% IFFWZFZ/ 1'33:er 193,: 6.: b. 12% v- c. 6% \ fig, a Vivi/l? e, ._ d. 8% VAC 931* fli.’ M 4. One—year Treasury bills yield 6 percent, while Treasury notes with 2—year maturities yield 6.7 percent. 6. 10% a; a; + ...—— If the expectations theory holds (that is, the maturity risk 9' remium is zero), what is the market’s forecast of what 1-year T—bills will be yieldm g one year from now. a.6.7% k—fizTflbfl: 67¢; 'bT': . 4% W... . A“ 1:. "18% e f d. 8.0% (was é?) :. (Haeé) (ii-1,) e. 8.2% X / 9L: 5. Given the following data, find the expected rate of inflation during the next year. r* 3 real risk—free rate = 3%. Maturity risk premium on 10—year Treasury bonds = 2%. It is Zero on 1—year bonds, and a linear relationship exists. Default risk premium on 10—year, A—rated Corporate bonds = 1.5%. Liquidity premium = 0%. ‘/ F 1~year Treasury security '- a3596 " . -. . b.4596 1711 2:5(fltfiilf c. 5.5% 2:22:12 a?! so 6. Interest rate on 4-year Treasury securities is currently 7%, while interest rates on 6-year Treasury securities are currently 7.5%. If the pure expectations theory is correct, what does the market believe that 2—year securities will be yielding 4 years from now? - 7596 (El “" 8.0% 8.5% 9.0% 9.5% 9999‘? 7. You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in. college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather. than continue in school, so you close out your account. How much money will you receive? _ . $1,171 fitfififif‘ I:.:)_ag $533 M ,, kc masks a (9 61er 11:53? twat/A616 8. Assume that you will receive $2,000 a year in Years 1 through 5, $3,000 a year in Years 6 through 8, and $4,000 in Year 9, with all cash flows to be received at the end of the year. If you require a 14 sue-993‘s» percent rate of return, what is the present value of these cashflow I . , v a. $9351 E. __: _ ;,.,-, __.. a . . . ; 1). $13,250 Md rid >16— .»tc 244 etc at: 2.1a Adi 0. $11,714 (1. $15,129 e. $17,353 9. If $100 is placed in an account that earns a nominal 4 percent, compounded quarterly, What will it be worth inSYears? a) :2 is; Ins/N: i": 2:132:21 NrFXL‘t‘2-w Fur—ream? 10. In 1958 the average tuition for one year at an Ivy League school was $1,800. Thirty years later, in 1988, the average cost was $13,700. What was the growth rate in tuition over the 30—year period? 12% F-Uefi‘l'BIJOD , 3% :figz? ngwfimx7i 1 l. Gomez Electronics needs to arrange financing for its expansion program. Bank A offers to lend Gomez the required funds on a loan in which interest must be paid monthly, and the quoted rate is 8 percent. Bank B will charge 9 percent, with interest due at the end of the year. What is the difference in the effective annual rates charged by the two banks? :1 3:23;”: {ENC A de~2 43%;: c. 0.70:/o . I 2': {3202’ hoe-ng .7... gmaall ~= . bag, .1”. 99-957? Answers: 1; _ - A:{Hg%3’ltan% 1E 2.13 3.D 25?: « l .. we -l 2-0.0 531% E” W“? OE lO.D 11.C ...
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This note was uploaded on 09/15/2011 for the course MLR 465 taught by Professor Gruby during the Spring '10 term at Cleveland State.

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practice test 2.2 - Practice Test 11 1. The real risk-free...

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