Quiz 6 homework

Question 1 1 out of 1 points

Interest rates You are considering an investment in 30 -year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 3.50 percent. Your broker has determined the following information about economic activity and the corporation bonds:

Real interest rate = 2.50%

Default risk premium = 1.75%

Liquidity risk premium = 0.70%

Maturity risk premium = 1.50%

What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds?

Question 2

0 out of 1 points

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?

Selected Answer:

Question 3

1 out of 1 points

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.

Question 4 0 out of 1 points

Which of these statements is true?

Selected

Question 5 0 out of 1 points

Which of the following is NOT a money market instrument?

Question 6

0 out of 1 points

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

Question 7 0 out of 1 points

Which of the following statements is correct?

Question 8

0 out of 1 points

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.

Question 9

0 out of 1 points

Suppose we observe the three-year Treasury security rate (1R3) to be 11%, the expected

one-year rate next year E(2r1) to be 4%, and the expected one-year rate the following year E(3r1) to be 5%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year Treasury security rate, 1R1?

Question 10

1 out of 1 points

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.

Question 11

1 out of 1 points

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(4r1), 4.10%. According to the liquidity premium hypotheses, what is the

liquidity premium on the 4-year Treasury security, L4?

Question 12

0 out of 1 points

Unbiased Expectations Theory The Wall Street Journal reports that the rate on 4-year Treasury securities is 4.75 percent and the rate on 5-year Treasury securities is 5.95 percent. According to the unbiased expectations hypotheses, what does the market expect the 1-year Treasury rate to be four years from today, E(5r1)?

Question 13

0 out of 1 points

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:

1R1 = 4.55%, 1R2 = 4.75%, 1R3 = 5.25%, 1R4 = 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.

Question 14

0 out of 1 points

This is a security formalizing an agreement between two parties to exchange a standard quantity of an asset at a predetermined price on a specified date in the future.

Question 15

0 out of 1 points

Primary market financial instruments include stock issues from firms allowing their equity shares to be publicly traded on stock market for the first time. We usually refer to these first-time issues as which of the following?