FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 6: Interest Rates

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 41

True/False

Review LaterAdd Note

Review Later

Since yield curves are based on a real risk-free rate plus the expected rate of inflation,at any given time there can be only one yield curve,and it applies to both corporate and Treasury securities.

A) True
B) False

Correct Answer

verified

Show Answer

Question 42

Multiple Choice

Review LaterAdd Note

Review Later

The real risk-free rate is 3.55%,inflation is expected to be 3.60% 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? (Round your final answer to 3 decimal places. )

A) 8.224%
B) 7.059%
C) 6.914%
D) 7.278%
E) 8.442%

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

Correct Answer

verified

Show Answer

Question 43

Multiple Choice

Review LaterAdd Note

Suppose 1-year Treasury bonds yield 4.00% while 2-year T-bonds yield 4.10%.Assuming the pure expectations theory is correct,and thus the maturity risk premium for T-bonds is zero,what is the yield on a 1-year T-bond expected to be one year from now? Round the intermediate calculations to 4 decimal places and final answer to 2 decimal places.

In the foreseeable future,the real risk-free rate of interest,r*,is expected to remain at 3%,inflation is expected to steadily increase,and the maturity risk premium is expected to be 0.1(t 1) %,where t is the number of years until the bond matures.Given this information,which of the following statements is CORRECT?

The Federal Reserve tends to take actions to increase interest rates when the economy is very strong and to decrease rates when the economy is weak.

Assuming the pure expectations theory is correct,which of the following statements is CORRECT?

One of the four most fundamental factors that affect the cost of money as discussed in the text is the availability of production opportunities and their expected rates of return.If production opportunities are relatively good,then interest rates will tend to be relatively high,other things held constant.

Niendorf Corporation's 5-year bonds yield 7.75%,and 5-year T-bonds yield 4.80%.The real risk-free rate is r* = 2.75%,the inflation premium for 5-year bonds is IP = 1.65%,the default risk premium for Niendorf's bonds is DRP = 1.20% 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 liquidity premium (LP) on Niendorf's bonds?

Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 4.80%.What rate of return would you expect on a 1-year Treasury security,assuming the pure expectations theory is valid? Disregard cross-product terms,i.e. ,if averaging is required,use the arithmetic average.

Crockett Corporation's 5-year bonds yield 6.35%,and 5-year T-bonds yield 4.45%.The real risk-free rate is r* = 2.80%,the default risk premium for Crockett's bonds is DRP = 1.00% versus zero for T-bonds,the liquidity premium on Crockett's bonds is LP = 0.90% 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 inflation premium (IP) is built into 5-year bond yields?

Kelly Inc's 5-year bonds yield 7.50% and 5-year T-bonds yield 5.80%.The real risk-free rate is r* = 2.5%,the default risk premium for Kelly's bonds is DRP = 0.40%,the liquidity premium on Kelly's bonds is LP = 1.3% versus zero on T-bonds,and the inflation premium (IP) is 1.5%.What is the maturity risk premium (MRP) on all 5-year bonds?

Suppose the interest rate on a 1-year T-bond is 5.00% and that on a 2-year T-bond is 4.10%.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? Round the intermediate calculations to 4 decimal places and final answer to 2 decimal places.

During periods when inflation is increasing,interest rates tend to increase,while interest rates tend to fall when inflation is declining.

One of the four most fundamental factors that affect the cost of money as discussed in the text is the risk inherent in a given security.The higher the risk,the higher the security's required return,other things held constant.

Suppose the real risk-free rate is 3.50%,the average future inflation rate is 2.50%,a maturity premium of 0.20% per year to maturity applies,i.e. ,MRP = 0.20%(t) ,where t is the number of years to maturity.Suppose also that a liquidity premium of 0.50% and a default risk premium of 2.70% applies to A-rated corporate bonds.What is the difference in the yields on a 5-year A-rated corporate bond and on a 10-year Treasury bond? Here we assume that the pure expectations theory is NOT valid,and disregard any cross-product terms,i.e. ,if averaging is required,use the arithmetic average.

The risk that interest rates will increase,and that increase will lead to a decline in the prices of outstanding bonds,is called "interest rate risk," or "price risk."

Assuming that the term structure of interest rates is determined as posited by the pure expectations theory,which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Suppose the real risk-free rate is 2.50% and the future rate of inflation is expected to be constant at 7.00%.What rate of return would you expect on a 5-year Treasury security,assuming the pure expectations theory is valid? Disregard cross-product terms,i.e. ,if averaging is required,use the arithmetic average.

Assume that interest rates on 20-year Treasury and corporate bonds are as follows: T-bond = 7.72% AAA = 8.72% A = 9.64% BBB = 10.18% The differences in these rates were probably caused primarily by: