Exam 6: Understanding Financial Markets and Institutions

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 one-year T-bills are currently earning 3.55 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real interest rate = 2.75 percent Default risk premium = 1.05 percent Liquidity risk premium = 0.50 percent Maturity risk premium = 1.85 percent What is the inflation premium?

The Wall Street Journal reports that the rate on four-year Treasury securities is 7.50 percent and the rate on five-year Treasury securities is 9.15 percent. According to the unbiased expectations hypothesis, what does the market expect the one-year Treasury rate to be four years from today, E(₅r₁)?

The Wall Street Journal reports that the rate on three-year Treasury securities is 4.75 percent and the rate on four-year Treasury securities is 5.00 percent. The one-year interest rate expected in three years is E(₄r₁), 5.25 percent. According to the liquidity premium theory, what is the liquidity premium on the four-year Treasury security, L₄?

In 20XX, the 10-year Treasury rate was 4.5 percent while the average 10-year Aaa corporate bond debt carried an interest rate of 6.0 percent. What is the average default risk premium on Aaa corporate bonds?

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 = 5.25%, ₁R₂ = 5.75%, ₁R₃ = 6.25%, ₁R₄ = 6.45% Using the unbiased expectations theory, what is the one-year forward rate on zero-coupon Treasury bonds for year 4 as of May 23, 20XX?

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 one-year T-bills are currently earning 3.55 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real interest rate = 2.75 percent Default risk premium = 1.05 percent Liquidity risk premium = 0.50 percent Maturity risk premium = 1.85 percent What is the fair interest rate on Moore Corporation 30-year bonds?

The Wall Street Journal reports that the current rate on five-year Treasury bonds is 2.85 percent and on 10-year Treasury bonds is 4.35 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a five-year Treasury bond purchased five years from today, E(₅r₅).

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?

Which of these is a comparison of market yields on securities, assuming all characteristics except maturity are the same?

Which of the following is NOT correct with respect to derivative securities?

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) = 5.5%, E(₃r₁) = 6.5%, E(₄r₁) = 7.0% Using the unbiased expectations theory, what is the current (long-term) rate for four-year-maturity Treasury securities?

Suppose we observe the following rates: ₁R₁ = 13 percent, ₁R₂ = 16 percent, and E(₂r₁) = 10 percent. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L₂?

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 percent, E(₂r₁) = 6 percent, E(₃r₁) = 7.5 percent E(₄r₁) = 6.85 percent Using the unbiased expectations theory, calculate the current (long-term) rates for one-, two-, three-, and four-year-maturity Treasury securities.

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?

According to this theory of term structure of interest rates, at any given point in time, the yield curve reflects the market's current expectations of future short-term rates.

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, ₂f₁? Maturity Yield One day 3.00\% One year 5.00 Two years 6.25 three years 8.00

One-year Treasury bill rates in 20XX averaged 5.15 percent and inflation for the year was 7.3 percent. If investors had expected the same inflation rate as that realized, calculate the real interest rate for 20XX according to the Fisher effect.

One-year interest rates are 3 percent. The market expects one-year rates to be 5 percent one year from now. The market also expects one-year rates to be 7 percent two years from now. Assume that the unbiased expectations theory holds. Which of the following is correct?

A corporation's 10-year bonds are currently yielding a return of 7.75 percent. The expected inflation premium is 3.0 percent annually and the real interest rate is expected to be 3.00 percent annually over the next 10 years. The liquidity risk premium on the corporation's bonds is 0.50 percent. The maturity risk premium is 0.25 percent on two-year securities and increases by 0.10 percent for each additional year to maturity. What is the default risk premium on the corporation's 10-year bonds?

Which of the following factors cause the demand for funds curve to shift?