1. Suppose the annual yield on a 2-year Treasury bond is 7.5% and the yield on a 1-year bond is 5%. Using the expectations theory, forecast the interest rate on a 1-year bond during the second year. 10% 2. Suppose the annual yield on a 2 year treasury bond is 7.5% and the yield on a 1-year bond is 5%, r* is 3% and the maturity risk premium is 0. What is the expected rate of inflation in year 2? 7% (7.5 x 2 = 15. 15-5 = 10. 3 + ? = 10. Answer = 7) 3. Suppose the annual yield on a 2 year treasury bond 7.5% and the yield on a 1 year bond is 9%, r* is 4% and the maturity risk premium is 1% per year. What is the expected inflation in year 2? 0% 4. Given o1= 20%, o2=30% and p12=0. To the nearest whole percent, what is oP for a portfolio weighted 60% stock 1 and 40% stock 2? 5. Your uncle would like to restrict his interest rate risk and his distant risk but he still would like to invest in corporate bonds. Which of the possible bonds listed below best stratifies you uncles criteria? AAA bond w/ 5year bond
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This note was uploaded on 12/12/2011 for the course FINA 363 taught by Professor Masoudie during the Fall '10 term at South Carolina.