Exam2SP08R

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? a. If the expectations theory is correct (that is, the maturity risk premium is zero), then an upward-sloping yield curve means that the market believes that interest rates will rise in the future. b. A 5-year corporate bond may have a yield less than a 10-year Treasury bond. c. The yield curve for corporate bonds may be upward sloping even if the Treasury yield curve is flat. d. All of these statements are 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? a. 7.2% b. 8.2% c. 8.0% d. 6.8% e. 8.4% 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? a. 5.25% b. 6.20%
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c. 6.00% d. 5.87% e. 6.50% 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 ____ 6. Assume that a 3-year Treasury note has no maturity risk premium, and that the real risk-free rate of interest is 3 percent. If the T-note carries a yield to maturity of 13 percent, and if the expected average inflation rate over the next 2 years is 11 percent, what is the implied expected inflation rate during Year 3? a.
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Exam2SP08R - Exam2SP08 Multiple Choice Identify the choice...

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