# FINANCE

55. One-year Treasury bills currently earn 3.75 percent. You expect that one year from now, one-year Treasury bill rates will increase to 4.15 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities?

A. 4.25%

B. 3.85%

C. 3.95%

D. 4.35%

56. One-year Treasury bills currently earn 4.5 percent. You expect that one year from now, one-year Treasury bill rates will increase to 6.65 percent. The liquidity premium on two-year securities is 0.05 percent. If the liquidity theory is correct, what should the current rate be on two-year Treasury securities?

A. 5.24%

B. 5.59%

C. 5.65%

D. 5.95%

57. Based on economists’ forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:

R_{1} = 5.95%

E(r_{2}) = 6.25% L_{2} = 0.05%

E(r_{3}) = 6.75% L_{3} = 0.10%

E(r_{4}) = 7.15% L_{4} = 0.12%

Using the liquidity premium hypothesis, what should be the current rate on four-year Treasury securities?

A. 6.59%

B. 6.75%

C. 6.82%

D. 7.13%

58. *The Wall Street Journal* reports that the rate on 3-year Treasury securities is 7.00%, and the 6-year Treasury rate is 6.20%. From discussions with your broker, you have determined that expected inflation premium is 2.25% next year, 2.50% in Year 2, and 2.50% in Year 3 and beyond. Further, you expect that real interest rates will be 4.4% annually for the foreseeable future. Calculate the maturity risk premium on the 3-year Treasury security.

A. 0.00%

B. 0.10%

C. 4.50%

D. 2.60%

59. *The Wall Street Journal* reports that the rate on 3-year Treasury securities is 6.50%, and the 6-year Treasury rate is 6.80%. From discussions with your broker, you have determined that expected inflation premium is 2.25% next year, 2.50% in Year 2, and 2.60% in Year 3 and beyond. Further, you expect that real interest rates will be 3.4% annually for the foreseeable future. Calculate the maturity risk premium on the 3-year and the 6-year Treasury security.

A. 3-year: 0.6%; 6-year: 0.80%

B. 3-year: 0.5%; 6-year: 0.90%

C. 3-year: 0.6%; 6-year: 1.20%

D. 3-year: 0.5%; 6-year: 0.80%

60. Nikki G’s Corporation’s 10-year bonds are currently yielding a return of 9.25%. The expected inflation premium is 2.0% annually and the real interest rate is expected to be 3.10% annually over the next 10 years. The liquidity risk premium on Nikki G’s bonds is 0.1%. The maturity risk premium is 0.10% on 2-year securities and increases by 0.05% for each additional year to maturity. Calculate the default risk premium on Nikki G’s 10-year bonds.

A. 2.55%

B. 5.65%

C. 3.55%

D. 1.85%

61. Suppose we observe the following rates: _{1}R_{1} = 12%, _{1}R_{2} = 15%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now, E(_{2}r_{1})?

A. 13.5%

B. 14.2%

C. 15.6%

D. 18.0%

62. *The Wall Street Journal* reports that the rate on 4-year Treasury securities is 7.50% and the rate on 5-year Treasury securities is 9.15%. According to the unbiased expectations hypotheses, what does the market expect the 1-year Treasury rate to be four years from today, E(_{5}r_{1})?

A. 16.0%

B. 18.4%

C. 15.9%

D. 13.7%

63. *The Wall Street Journal* reports that the rate on 3-year Treasury securities is 7.25% and the rate on 4-year Treasury securities is 8.50%. The one-year interest rate expected in three years is E(_{4}r_{1}), 4.10%. According to the liquidity premium hypotheses, what is the liquidity premium on the 4-year Treasury security, L_{4}?

A. 6.7%

B. 7.1%

C. 8.2%

D. 9.6%

64. Suppose we observe the following rates: _{1}R_{1} = 13%, _{1}R_{2} = 16%, and E(_{2}r_{1}) = 10%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L_{2}?

A. 8.7%

B. 9.1%

C. 9.7%

D. 10.0%

65. You note the following yield curve in *The Wall Street Journal.* According to the unbiased expectations hypothesis, what is the one-year forward rate for the period beginning one year from today, _{2}f_{1}?

A. 7.6%

B. 8.6%

C. 9.0%

D. 10.2%

66. On May 23, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were as follows:

_{1}R_{1} = 4.55%, _{1}R_{2} = 4.75%, _{1}R_{3} = 5.25%, _{1}R_{4} = 5.95%

Using the unbiased expectations theory, calculate the one-year forward rates on zero-coupon Treasury bonds for years two, three, and four as of May 23, 20XX.

A. Year 1: 4.95%; Year 2: 6.26%; Year 3: 8.08%

B. Year 1: 3.75%; Year 2: 6.02%; Year 3: 9.00%

C. Year 1: 4.95%; Year 2: 7.26%; Year 3: 8.08%

D. Year 1: 3.65%; Year 2: 6.32%; Year 3: 11.08%

67. *The Wall Street Journal* reports that the current rate on 10-year Treasury bonds is 6.25%, on 20-year Treasury bonds is 7.95%, and on a 20-year corporate bond is 10.75%. Assume that the maturity risk premium is zero. If the default risk premium and liquidity risk premium on a 10-year corporate bond is the same as that on the 20-year corporate bond, calculate the current rate on a 10-year corporate bond.

A. 9.05%

B. 6.15%

C. 7.60%

D. 8.70%

68. *The Wall Street Journal* reports that the current rate on 5-year Treasury bonds is 6.45% and on 10-year Treasury bonds is 7.75%. Assume that the maturity risk premium is zero. Calculate the expected rate on a 5-year Treasury bond purchased five years from today, E(_{5}r_{5}).

A. 7.25%

B. 8.12%

C. 9.07%

D. 10.16%

69. Suppose we observe the three-year Treasury security rate (_{1}R_{3}) to be 11%, the expected one-year rate next year E(_{2}r_{1}) to be 4%, and the expected one-year rate the following year E(_{3}r_{1}) to be 5%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year Treasury security rate, _{1}R_{1}?

A. 18.57%

B. 10.19%

C. 23.19%

D. 25.24%

70. Assume the current interest rate on a one-year Treasury bond (_{1}R_{1}) is 5.50%, the current rate on a two-year Treasury bond (_{1}R_{2}) is 5.95%, and the current rate on a three-year Treasury bond (_{1}R_{3}) is 8.50%. If the unbiased expectations theory of the term structure of interest rates is correct, what is the one-year interest rate expected on Treasury bills during year 3, _{3}f_{1}?

A. 13.79%

B. 12.29%

C. 11.69%

D. 10.29%

71. If the yield curve is downward sloping, what is the yield to maturity on a 30-year Treasury bond relative to a 10-year Treasury bond?

A. The yield on the 10-year bond must be greater than the yield on the 30-year bond.

B. The yield on the 10-year bond must be less than the yield on the 30-year bond.

C. The yields on the two bonds are equal.

D. We need to know the other risk premiums to answer this question.