Filters
Question type
Study Flashcards

Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 2.25%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t) , where t is the years to maturity. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.


A) 5.08%
B) 5.35%
C) 5.62%
D) 5.90%
E) 6.19%

F) A) and B)
G) A) and C)

Correct Answer

verifed

verified

One of the four most fundamental factors that affect the cost of money as discussed in the text is the current state of the weather. If the weather is dark and stormy, the cost of money will be higher than if it is bright and sunny, other things held constant.

A) True
B) False

Correct Answer

verifed

verified

The risk that interest rates will decline, and that decline will lead to a decline in the income provided by a bond portfolio as interest and maturity payments are reinvested, is called "reinvestment rate risk."

A) True
B) False

Correct Answer

verifed

verified

True

The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) weather conditions.

A) True
B) False

Correct Answer

verifed

verified

The real risk-free rate is 3.55%, inflation is expected to be 3.15% this year, and the maturity risk premium is zero. Taking account of the cross-product term, i.e., not ignoring it, what is the equilibrium rate of return on a 1-year Treasury bond?


A) 5.840%
B) 6.148%
C) 6.471%
D) 6.812%
E) 7.152%

F) D) and E)
G) None of the above

Correct Answer

verifed

verified

D

One of the four most fundamental factors that affect the cost of money as discussed in the text is the expected rate of inflation. If inflation is expected to be relatively high, then interest rates will tend to be relatively low, other things held constant.

A) True
B) False

Correct Answer

verifed

verified

Assume that the rate on a 1-year bond is now 6%, but all investors expect 1-year rates to be 7% one year from now and then to rise to 8% two years from now. Assume also that the pure expectations theory holds, hence the maturity risk premium equals zero. Which of the following statements is CORRECT?


A) The yield curve should be downward sloping, with the rate on a 1-year bond at 6%.
B) The interest rate today on a 2-year bond should be approximately 6%.
C) The interest rate today on a 2-year bond should be approximately 7%.
D) The interest rate today on a 3-year bond should be approximately 7%.
E) The interest rate today on a 3-year bond should be approximately 8%.

F) A) and D)
G) D) and E)

Correct Answer

verifed

verified

Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 2.25%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t) , where t is the years to maturity. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid? Include the cross-product term, i.e., if averaging is required, use the geometric average.


A) 5.15%
B) 5.42%
C) 5.69%
D) 5.97%
E) 6.27%

F) A) and B)
G) A) and C)

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) The yield on a 3-year Treasury bond cannot exceed the yield on a 10 year Treasury bond.
B) The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond.
C) The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond.
D) The yield on a 10-year AAA-rated corporate bond should always exceed the yield on a 5-year AAA-rated corporate bond.
E) The following represents a “possibly reasonable” formula for the maturity risk premium on bonds: MRP = -0.1%(t) , where t is the years to maturity.

F) B) and D)
G) B) and C)

Correct Answer

verifed

verified

Suppose the interest rate on a 1-year T-bond is 5.00% and that on a 2 year T-bond is 6.00%. Assume that the pure expectations theory is NOT valid, and the MRP is zero for a 1-year T-bond but 0.40% for a 2-year bond. What is the yield on a 1-year T-bond expected to be one year from now?


A) 5.32%
B) 5.60%
C) 5.89%
D) 6.20%
E) 6.51%

F) All of the above
G) A) and B)

Correct Answer

verifed

verified

Kop Corporation's 5-year bonds yield 6.50%, and T-bonds with the same maturity yield 4.40%. The default risk premium for Kop's bonds is DRP = 0.40%, the liquidity premium on Kop's bonds is LP = 1.70% versus zero on T-bonds, the inflation premium (IP) is 1.50%, and the maturity risk premium (MRP) on 5-year bonds is 0.40%. What is the real risk-free rate, r*?


A) 2.04%
B) 2.14%
C) 2.26%
D) 2.38%
E) 2.50%

F) B) and E)
G) A) and E)

Correct Answer

verifed

verified

Which of the following statements is CORRECT, other things held constant?


A) If companies have fewer good investment opportunities, interest rates are likely to increase.
B) If individuals increase their savings rate, interest rates are likely to increase.
C) If expected inflation increases, interest rates are likely to increase.
D) Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.
E) Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.

F) A) and B)
G) A) and C)

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) Even if the pure expectations theory is correct, there might at times be an inverted Treasury yield curve.
B) If the yield curve is inverted, short-term bonds have lower yields than long-term bonds.
C) The higher the maturity risk premium, the higher the probability that the yield curve will be inverted.
D) Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve cannot become inverted.
E) The most likely explanation for an inverted yield curve is that investors expect inflation to increase in the future.

F) A) and E)
G) A) and C)

Correct Answer

verifed

verified

Because the maturity risk premium is normally positive, the yield curve is normally upward sloping.

A) True
B) False

Correct Answer

verifed

verified

True

Kern Corporation's 5-year bonds yield 7.30% and 5-year T-bonds yield 4.10%. The real risk-free rate is r* = 2.5%, the default risk premium for Kern's bonds is DRP = 1.90% versus zero for T-bonds, the liquidity premium on Kern's bonds is LP = 1.3%, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) × 0.1%, where t = number of years to maturity. What is the inflation premium (IP) on all 5-year bonds?


A) 1.20%
B) 1.32%
C) 1.45%
D) 1.60%
E) 1.68%

F) B) and D)
G) None of the above

Correct Answer

verifed

verified

Short Corp just issued bonds that will mature in 10 years, and Long Corp issued bonds that will mature in 20 years. Both bonds promise to pay a semiannual coupon, they are not callable or convertible, and they are equally liquid. Further assume that the Treasury yield curve is based only on the pure expectations theory. Under these conditions, which of the following statements is CORRECT?


A) If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds.
B) If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than Short's bonds.
C) If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal.
D) If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have a lower yield than Long's bonds.
E) If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield.

F) A) and B)
G) A) and C)

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) The higher the maturity risk premium, the higher the probability that the yield curve will be inverted.
B) The most likely explanation for an inverted yield curve is that investors expect inflation to increase.
C) The most likely explanation for an inverted yield curve is that investors expect inflation to decrease.
D) If the yield curve is inverted, short-term bonds have lower yields than long-term bonds.
E) Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve can never be inverted.

F) A) and B)
G) A) and E)

Correct Answer

verifed

verified

Koy Corporation's 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Koy's bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) × 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on Koy's bonds?


A) 5.94%
B) 6.60%
C) 7.26%
D) 7.99%
E) 8.78%

F) B) and E)
G) C) and E)

Correct Answer

verifed

verified

If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?


A) The yield on a 10-year bond would be less than that on a 1-year bill.
B) The yield on a 10-year bond would have to be higher than that on a 1 year bill because of the maturity risk premium.
C) It is impossible to tell without knowing the coupon rates of the bonds.
D) The yields on the two securities would be equal.
E) It is impossible to tell without knowing the relative risks of the two securities.

F) A) and C)
G) A) and B)

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) If the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping.
B) If the maturity risk premium (MRP) equals zero, the Treasury bond yield curve must be flat.
C) If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping.
D) If the expectations theory holds, the Treasury bond yield curve will never be downward sloping.
E) Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds.

F) A) and B)
G) B) and C)

Correct Answer

verifed

verified

Showing 1 - 20 of 82

Related Exams

Exam 1

Overview

65 Questions

Exam 2

Financial Markets

33 Questions

Exam 3

Financial Statements

129 Questions

Exam 4

Statement Analysis

127 Questions

Exam 5

Time Value of Money

164 Questions

Exam 6

Forecasting

39 Questions

Exam 8

Risk and Return

147 Questions

Exam 9

Bonds

92 Questions

Exam 10

Stocks

82 Questions

Exam 11

Cost of Capital

92 Questions

Exam 12

Capital Budgeting Mc Problems

107 Questions

Exam 13

Cash Flow and Risk

78 Questions

Exam 14

Real Options

41 Questions

Exam 15

Capital Structure

88 Questions

Exam 16

Dividends

75 Questions

Exam 17

Working Capital

127 Questions

Exam 18

Derivatives

35 Questions

Exam 19

Multinational

50 Questions

Exam 20

Hybrid Financing

60 Questions

Exam 21

Mergers

39 Questions

Show Answer