1. Assume interest rates on Treasury bonds, with the indicated time to maturities as follows:
15 years = 7.72%
20 years = 8.72%
25 years = 9.64%
30 years = 10.18%
The differences in rates among these bonds is caused by: (please briefly explain your choice)
a. Tax effects
b. Default risk premiums
c. Maturity risk premiums
d. A down sloping yield curve
e. Liquidity risk premiums
2. Which statement is False? (please briefly explain your choice)
a. The default risk premium is applied to all bonds including U.S. Government ones.
b. The liquidity premium requires that an asset can be sold both quickly and for fair market value.
c. The inflation premium is added on to the required return to protect the purchasing power of an investors earnings.
d. The market risk premium is added to all bonds, even U.S. Government ones.
3. Over the next 3 years inflation is expected to be: Year one 2.5%, year two 3.5%, year three 4%. What should investors require for an inflation premium on a Treasury bond with a three-year maturity? (please show your work)
4 If the rate of inflation is expected to be 0% for the next 4 years will the yield curve have an upward slope? (please briefly explain your answer)
Dear Student Please find... View the full answer