FINANCE

46. Forecasting Interest Rates A recent edition of The Wall Street Journal reported interest rates of 3.10 percent, 3.50 percent, 3.75 percent, and 3.95 percent for three-year, four-year, five-year, and six-year Treasury security yields, respectively, According to the unbiased expectation theory of the term structure of interest rates, what are the expected one-year rates for year 6?
A. 3.575%
B. 3.95%
C. 4.96%
D. 5.33%

 

47. A particular security’s default risk premium is 3%. For all securities, the inflation risk premium is 1.75% and the real interest rate is 4.2%. The security’s liquidity risk premium is 0.35% and maturity risk premium is 0.95%. The security has no special covenants. Calculate the security’s equilibrium rate of return.
A. 8.50%
B. 6.05%
C. 10.25%
D. 9.90%

 

48. You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 3.55%. Your broker has determined the following information about economic activity and Moore Corporation bonds:

Real interest rate = 2.75%
Default risk premium = 1.05%
Liquidity risk premium = 0.50%
Maturity risk premium = 1.85%

What is the inflation premium?
A. 0.80%
B. 1.25%
C. 6.25%
D. 8.00%

 

49. You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 3.55%. Your broker has determined the following information about economic activity and Moore Corporation bonds:

Real interest rate = 2.75%
Default risk premium = 1.05%
Liquidity risk premium = 0.50%
Maturity risk premium = 1.85%

What is the fair interest rate on Moore Corporation 30-year bonds?
A. 3.80%
B. 6.45%
C. 6.95%
D. 9.70%

 

50. Dakota Corporation 15-year bonds have an equilibrium rate of return of 9%. For all securities, the inflation risk premium is 1.95% and the real interest rate is 3.65%. The security’s liquidity risk premium is 0.35% and maturity risk premium is 0.95%. The security has no special covenants. Calculate the bond’s default risk premium.
A. 2.10%
B. 3.05%
C. 3.40%
D. 2.45%

 

51. A 2-year Treasury security currently earns 5.13%. Over the next 2 years, the real interest rate is expected to be 2.15% per year and the inflation premium is expected to be 1.75% per year. Calculate the maturity risk premium on the 2-year Treasury security.
A. 5.13%
B. 3.38%
C. 2.98%
D. 1.23%

 

52. Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following 3 years (i.e., years 2, 3 and 4, respectively) are as follows:
1R1 = 5%, E(2r1) = 7%, E(3r1) = 7.5% E(4r1) = 7.85%
Using the unbiased expectations theory, calculate the current (long-term) rates for one-year and two-year -maturity Treasury securities.
A. One-year: 5.00%; Two-year: 5.50%
B. One-year: 5.00%; Two-year: 6.00%
C. One-year: 5.50%; Two-year: 6.15%
D. One-year: 5.50%; Two-year: 5.75%

 

53. Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following 3 years (i.e., years 2, 3 and 4 respectively) are as follows:
1R1 = 5%, E(2r1) = 6%, E(3r1) = 7.5% E(4r1) = 7.85%
Using the unbiased expectations theory, calculate the current (long-term) rates for three-year- and four-year-maturity Treasury securities.
A. One-year: 6.16%; Two-year: 6.58%
B. One-year: 6.16%; Two-year: 6.78%
C. One-year: 6.25%; Two-year: 6.45%
D. One-year: 5.95%; Two-year: 6.45%

 

54. Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:
1R1 = 5%, E(2r1) = 6%, E(3r1) = 7.5% E(4r1) = 6.85%

Using the unbiased expectations theory, calculate the current (long-term) rates for one-, two-, three-, and four-year-maturity Treasury securities.
A. 5.00%; 5.50%; 6.16%; 6.33%
B. 5.00%; 5.25%; 6.10%; 6.27%
C. 5.00%; 5.50%; 6.10%; 6.23%
D. 5.00%; 5.25%; 6.16%; 6.49%

 

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