You are given the following data: $\begin{array} {| l | c | } \hline r ^ { * } = \text { real risk-free rate } & 4 \% \\ \hline \text { Constant inflation premium (IP) } & 7 \% \\ \hline \text { Maturity risk premium (MRP) } & 1 \% \\ \hline \text { Default risk premium for AAA bonds (DRP) } & 3 \% \\ \hline \begin{array} { l } \text { Liquidity premium for long-term Treasury } \\ \text { bonds (T-bonds) (LP) } \end{array} & 2 \% \\ \hline \end{array}$ Assume that a highly liquid market does not exist for long-term T-bonds, and the expected rate of inflation is a constant. Given these conditions, the rate on long-term Treasury bonds is _____.

A) 23 percent B) 11 percent C) 14 percent D) 19 percent E) 27 percent A) 23 percent B) 11 percent C) 14 percent D) 19 percent E) 27 percent

Exam 5: The Cost of Money Interest Rates

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The _________ theory that has been developed to explain the shape of the yield curve suggests that the curve should normally be upward sloping, because, everything else equal, an upward sloping curve implies that lenders prefer to lend short-term funds at lower rates than they lend long-term funds.

(Multiple Choice)

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Question 61

You are given the following data: = real risk-free rate 4\% Constant inflation premium (IP) 7\% Maturity risk premium (MRP) 1\% Default risk premium for AAA bonds (DRP) 3\% Liquidity premium for long-term Treasury bonds (T-bonds) (LP) 2\% Assume that a highly liquid market does not exist for long-term T-bonds, and the expected rate of inflation is a constant. Given these conditions, the rate on long-term Treasury bonds is _____.

(Multiple Choice)

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Question 62

Treasury securities that mature in 6 years currently have an interest rate of 8.50 percent. Inflation is expected to be 5 percent in each of the next three years and 6 percent each year thereafter. The maturity risk premium is estimated to be 0.10% × (t - 1), where t is equal to the maturity of the bond (i.e., the maturity risk premium of a one-year bond is zero). The real risk-free rate is assumed to be constant over time. What is the real risk-free rate of interest?

(Multiple Choice)

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Question 63

A corporate bond that yields 12 percent includes a risk-free rate of 7 percent and a default risk premium of 3 percent. The bond's maturity risk premium is _____.

(Multiple Choice)

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Question 64

If the Federal Reserve sells $50 billion of short-term U.S. Treasury securities to the public, other things held constant, what will this tend to do to short-term security prices and interest rates?

(Multiple Choice)

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Question 65

Assume that the current interest rate on a one-year bond is 8 percent, the current rate on a two-year bond is 10 percent, and the current rate on a three-year bond is 12 percent. If the expectations theory of the term structure is correct, what is the one-year interest rate expected during Year 3? (Base your answer on an arithmetic average rather than a geometric average.)

(Multiple Choice)

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Question 66

Which of the following statements is true?

(Multiple Choice)

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Question 67

During periods of _____, the general tendency is toward higher interest rates.

(Multiple Choice)

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Question 68

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The _________ theory that has been developed to explain the shape of the yield curve suggests that the curve should normally be upward sloping, because, everything else equal, an upward sloping curve implies that lenders prefer to lend short-term funds at lower rates than they lend long-term funds.

A corporate bond that yields 12 percent includes a risk-free rate of 7 percent and a default risk premium of 3 percent. The bond's maturity risk premium is _____.

If the Federal Reserve sells $50 billion of short-term U.S. Treasury securities to the public, other things held constant, what will this tend to do to short-term security prices and interest rates?

Which of the following statements is true?

During periods of _____, the general tendency is toward higher interest rates.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

Bonds Debt Characteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

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