# 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:

_{1}R_{1} = 5%, E(_{2}r_{1}) = 7%, E(_{3}r_{1}) = 7.5% E(_{4}r_{1}) = 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:

_{1}R_{1} = 5%, E(_{2}r_{1}) = 6%, E(_{3}r_{1}) = 7.5% E(_{4}r_{1}) = 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:

_{1}R_{1} = 5%, E(_{2}r_{1}) = 6%, E(_{3}r_{1}) = 7.5% E(_{4}r_{1}) = 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%