Exam2SP08R - Exam2SP08 Multiple Choice Identify the choice...

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Exam2SP08 Multiple Choice Identify the choice that best completes the statement or answers the question. Not in the Ross textbook ____ 1. For the foreseeable future, the real risk-free rate of interest, r*, is expected to remain at 3 percent. Inflation is expected to steadily increase over time. The maturity risk premium equals 0.1(t - 1)%, where t represents the bond's maturity. On the basis of this information, which of the following statements is most correct? a. The yield on 10-year Treasury securities must exceed the yield on 2-year Treasury securities. b. The yield on 10-year Treasury securities must exceed the yield on 5-year corporate bonds. c. The yield on 10-year corporate bonds must be lower than the yield on 8-year Treasury securities. d. All of these statements are correct. Not in the Ross textbook ____ 2. Which of the following is most correct? Not in the Ross textbook ____ 3. The real risk-free rate of interest, r*, is 3 percent. Inflation is expected to be 4 percent this year, 5 percent next year, and 3 percent per year thereafter. The maturity risk premium equals 0.1%(t - 1), where t equals the bond's maturity. That is, a 5-year bond has a maturity risk premium of 0.4 percent or 0.004. A 5-year corporate bond yields 8 percent. What is the yield on a 10-year corporate bond that has the same default risk and liquidity premiums as the 5-year corporate bond? Not in the Ross textbook ____ 4. You observe the following yield curve for Treasury securities: Maturity Yield 1 year 5.8% 2 years 6.2 3 years 6.5 4 years 6.2 5 years 6.0 Assume that the expectations theory is correct. What does the market expect the rate on two-year Treasury securities will be three years from today?
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Not in the Ross textbook ____ 5. You read in The Wall Street Journal that 30-day T-bills are currently yielding 8 percent. Your brother-in-law, a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums: Inflation premium = 5%. Liquidity premium = 1%. Maturity risk premium = 2%. Default risk premium = 2%. On the basis of these data, the real risk-free rate of return is a. 0% b. 1% c. 2% d. 3% e. 4% Not in the Ross textbook ____
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